By Jeffrey Meenes, CFP® (Published Date November 3, 2022)
You can't read about investments for very long without hearing about inflation. The concept may be a little difficult to understand, but at its most basic, it comes down to the following: prices rise over time, causing your money to lose some purchasing power. If you could buy a car in 1980 for $5,500 and a comparable make and model for $49,000 in 2022, that speaks to the change in purchasing power. Sure, your 2022 model probably has a nicer stereo and several other value-added gizmos, but for the most part, your $5,500 doesn't have the same purchasing power in 2022 that it had in 1980.1
In 2022, we're seeing inflation like nothing we've encountered in decades. It's risen above 8% at times, sending prices through the roof. Inflation is charted in part by measuring the changes in what consumers pay through the Consumer Price Index against the Producer Price Index, which measures the prices that producers receive for their products. Through this, the Federal Reserve finds that the rate that indicates ideal employment and prices is 2%. What moves the needle? There are a number of factors, including demand-pull inflation, where demand for a good or service increases, but the supply filling that demand stays the same, causing prices to increase. The opposite can also be a factor with cost-push inflation, where the supply of a good or service is low, causing the prices to go up.2
What can you, as an investor, do to fight inflation? The general strategy in this case is to weather the storm which can be helped in some ways by maintaining an appropriately diversified investment portfolio. This often means owning a combination of equities and fixed income(bonds) along with other products like real estate and tangible assets which can be hedges against inflation over time. However, this typically only works if you are already invested as the inflation rises. Many investors look to take advantage of the more consistent, and higher, returns of bonds in these periods. The returns of bonds may be more consistent than other investments, however, the returns may also be lower.1,2
Weathering high inflation periods can be difficult for investors, but sensible strategies and careful management may help you maneuver accordingly.
This content is developed from sources believed to be providing accurate information, and provided by Meenes Wealth Partners. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.