We are seeing the highest rates of inflation in almost 40 years. The Consumer Price Index, a key inflation barometer, rose by 6.8% for the 12 months ending in November of 2021. This was not a seasonally adjusted measurement. This is the highest jump in this index since June of 1982.
What’s behind this increase and what can investors do to mitigate the impact of inflation on their financial situation? There are a number of factors fueling this inflation and a number of strategies to protect yourself from the impact of inflation.
Factors Causing This Inflation
There are many factors behind these inflation numbers. Some sectors are experiencing labor shortages. Employers are having to offer higher wages and salaries, increasing their costs which are then passed onto customers in the form of higher prices.
We’ve seen many stories in the news about supply chain issues. A chip shortage has impacted a number of industries, including the automobile industry. The chip shortage has limited the production of new cars in some cases, driving up the purchase price. In addition, the shortage of new cars is driving up the price some car dealers are paying for used cars, they then turn around and sell these used vehicles at even higher prices.
What the Fed plans to Do to Control Inflation
The consensus forecast of members of the Fed’s Open Market Committee is that there will be three rate hikes during 2022. There is usually an inverse relationship between the direction of interest rates and inflation. Rising interest rates tend to put a damper on economic growth and inflation. These projections also call for two more rate hikes each in 2023 and 2024.
The Fed will also be accelerating it’s tapering of bond purchases from earlier projections. They will be decreasing the pace of their bond buying, putting less money back into the economy. This serves to help reduce the money supply, dampening economic growth and reducing inflation.
Positioning Your Portfolio to Protect Against Inflation
While you likely don’t want to do a major revamp of your investing strategy, there are some things you can do to help position your portfolio for a period of inflation.
Mark Bluestein, Managing Director, Investments of Bluestein Wealth Management Group of Wedbush Securities says, “Given the Fed’s recent comments the markets are expecting three ¼ point rate hikes in 2022, and I think it could be more depending on inflation readings the first half of the year. In that environment I think investors in high momentum, high multiple stocks including technology need to be vigilant. Protected growth strategies should be considered for some equity investors.”
Some assets to consider for portfolios as an inflation hedge include:
- Real assets such as real estate. Real estate, including various types of rental properties, are historically a good hedge against inflation. This may be especially true in the current environment for housing which has seen a marked increase in selling prices.
- TIPs or inflation-protected Treasuries offer a measure of inflation protection for fixed income investors with an interest rate tied to the rate of inflation.
- Gold has long been considered as a hedge against inflation, with its price generally increasing as the purchasing power of the dollar decreases. ETFs that invest in gold might be a good alternative for investors who don’t want to own physical gold.
How Are Investors Responding?
Many investors are rethinking their investment strategy in the face of higher inflation. Many experts are suggesting investments in sectors that are historically good hedges against inflation.
One such sector is real estate. Housing prices in many areas of the country are increasing at unprecedented rates. Both private investments in real estate and publicly traded REITs can be good options in this environment.
Cyclical stocks can be another good option for periods of inflation. Companies whose revenues and bottom line grows during periods of increased economic activity include banks and some cyclical industries, such as industrials and companies in the material sector, whose pricing power can help during inflationary periods.
Excess cash holdings over and above what’s needed for basic liquidity are not a good idea during periods of inflation. Tech stocks and stocks in companies in the consumer staples sectors may underperform during a period of prolonged inflation.
Your Wedbush financial advisor can help you review your portfolio and investing strategy to help determine if any adjustments are needed to protect your returns from the impact of inflation. Give them a call to schedule a review session.
Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.