It seems like there isn’t a safe place to run or hide from the inflation headlines.
And it’s not surprising how this hot topic made national coverage. Most recent data from the Bureau of Labor Statistics noted that inflation soared 7% over the past year, causing the highest prices for consumer goods in nearly 40 years—that info is undoubtedly going to make its way around town.
Yes, rising inflation is a topic to keep your eye on, but what impact does it have (if any) on your financial plan?
Let’s find out.
What’s Inflation, Anyway?
Broadly, inflation represents a loss of purchasing power as the price of goods and services increases. More simply, your dollar isn’t worth as much. Here’s an example using an inflation calculator.
Say in 1920 you purchased your favorite diner breakfast (pancakes, of course) for $1.00. Today, that same item would cost roughly $13.94—a 1294.0% cumulative inflation rate.
*I knew I should’ve invested in pancakes”
This example illustrates that $1 in 1920 isn’t the same as $1 in 2022 because the average price for goods, in this case, food, has steadily increased.
Inflation measures the change in prices among a basket of goods and services, like food, utilities, healthcare, entertainment, and more, over a set period. One of the most common ways to track these price shifts is the Consumer Price Index (CPI).
The CPI measures the average change in prices for categories of goods and services associated with the cost of living, making it an excellent indicator of inflationary periods. Other indices like the Wholesale Price Index (the price of goods before they go to retail) and the Producer Price Index (the average change of selling prices) help track and measure inflation as well.
Why Is Inflation So High Right Now?
Generally, inflation has been 1-2% in recent years, averaging 2.73% over the past 40 years, making the current 7% a significant outlier.
So, what happened?
Naturally, the pandemic had a lot to do with it.
First, supply and demand are at a momentous imbalance. Soaring vaccination rates coupled with increased purchasing power via federal relief aid over the past two years gave people leeway to spend money, infusing the economy with considerable capital.
But supply couldn’t (and still can’t) keep up with demand. The U.S is experiencing record supply-chain issues, which makes producing and delivering goods more expensive. Rising production costs and dwindling supply also push the final product price through the roof.
Inflation rates will likely remain lopsided as companies wrestle with labor shortages, supply chain delays, and exceptionally high demand. While no one knows exactly how long the high-inflation environment will last, some promising signs are on the horizon.
Tangled supply chains are coming back online, at least for some industries. Plus, the Federal Reserve (The Fed) is creating a plan to counteract these unnaturally high inflation levels, like raising interest rates and tightening their monetary policy to slow the economy—though they’ll need to be careful of slowing the economy too much and triggering a recession.
What Does All Of This Have To Do With Your Investments?
Honestly, not a whole lot, which should come as a relief to many worried investors.
Data from Dimensional Fund Advisors demonstrates that there isn’t a “reliable connection” between high or low inflation periods and U.S stock returns over the past three decades—longer than the average retirement time horizon.
Prepping for inflation is a significant part of building a robust retirement investment and income plan. And one of the most important actions you can take to ward off inflation is simply staying invested.
Dimensional Fund Advisor’s research also notes that staying invested helps outpace inflation in most asset classes over the long term. So in many cases, the best thing you can do is hang tight and trust your investment plan.
Another critical way to curtail the impacts of inflation is to stay within the spending parameters outlined in your plan. Essentially, this means avoiding overspending when the markets are performing well. Excess returns in good years can provide a cushion for your plan when the markets start to wobble.
With us, your financial plans are built with inflation in mind, and our team monitors the minutia and can make necessary adjustments to your plan as needed.
Also, ask yourself, have your long-term goals changed?
If not, it likely doesn’t make sense to make drastic changes to your investment plan. Significant changes like altering your allocations and pulling money out of the market will only exacerbate the issue and could bring more troubles later on.
It’s always tough to move through a turbulent economic season, but keeping your eye on the long-term is an excellent way to help you view the situation from a different perspective and avoid making spontaneous financial decisions that could hurt your plan down the line.
It’s our goal to help you retire with confidence and excitement, and the data continues to highlight that staying invested is one of the best ways to bring that goal to reality. Here’s an additional resource if you’re looking for more tips on staying invested throughout various market conditions.
Inflation Is Part Of A Healthy Economic Cycle, and We’re Here To Help You Through It
Inflation isn’t inherently bad. In fact, a little inflation tends to be a good sign for the economy as it marks economic growth.
As with most things in life, it’s all about balance, and right now, the balance is off. But it won’t be that way forever.
While you’ll likely feel the short-term pains of inflation—from your morning coffee to grocery runs to commutes—a solid long-term investment strategy is one of the best ways to keep pace with inflation over time.
It’s also important to focus on the things that you can control, like remaining dedicated to your carefully curated financial plan and not over-stressing about the things you can’t control, like market movements or how much your dinner costs.
Our team is here to help you navigate challenging financial periods, renew your confidence in your financial plan, and get you excited about your future opportunities. If you’d like to talk about your specific investment plan, set up a time to speak with our team.
We’re in your corner and will walk by your side no matter the flashy headline of the moment.