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How Will Record Inflation Affect My Investing Strategy?

Have you noticed the increase in “alternative meats” in your grocery store lately? They go under names like Impossible Foods, Beyond Meat and so on. Some consumers may be switching to these non-meat substitutes as part of a shift to a healthier or more sustainable lifestyle. However, other folks are trying these products for the first time because meat and other food items have gotten so much more expensive. According to the U.S. Labor Department, staples like meat, poultry, eggs, and fish are up in price by double digits since November 2020. (Thanks, COVID-19, supply-chain issues and weird weather!)

Increasing food prices are just one example of rising U.S. inflation, which is now at the highest rate we’ve seen in nearly four decades. The Consumer Price Index (CPI), a common measure of inflation, is up a record 8.5% when comparing March 2022 with the prior year. While that might not sound like a lot at first glance, that price increase can do a lot to erode the purchasing power of your dollar. The more you pay for everyday items, the less money you may accumulate in your retirement or long-term savings plan.

Beyond Food Prices

It’s not just grocery costs that are moving upward:

  • New and used vehicles have skyrocketed in price and become hard to find due to the shortage of computer chips needed to run them.
  • Rents have gone up significantly since the moratorium on rent increases and evictions expired.
  • Wages are higher, partly because many jobs are still hard to fill. Employers are offering bonuses and other incentives to keep existing workers and entice new employees. And even if everyone who was looking for a job in the United States found one, four million jobs would still remain empty!

The Road to Economic Recovery

The good news is that some of these inflation-related elements are just temporary. Food and car prices should eventually normalize. However, high wages and rents may stay with us for quite a while. As such, we expect elevated inflation to stick around for the next couple of years. However, the rates should be a bit lower than the record-breaking CPI of 8.5 percent. Why?

  • The Fed is expected to raise interest rates multiple times this year
  • The possibility of a stronger dollar due to economic growth and rising rates
  • It will be hard for prices to record as high of a growth rate in 2022 since we are comparing them to the already high prices of 2021
  • Supply chain bottlenecks should ease. When consumer demand for products is met with sufficient supply, inflation naturally settles.
  • The service-related economy should continue to recover. This sector typically isn’t limited by supply-chain problems and therefore could help dampen inflation.

How Will Investments Perform?

The big question, of course, is: how could these changes impact your investments? We see many reasons to remain positive. The economy continues to be on sound footing, and earnings reports show healthy profits. However, asset returns will likely be more modest and volatile than they have been in recent years. The key will be to focus on asset classes that do well in an environment of rising rates and inflation. A few insights to consider:

  • Traditional stocks and bonds will probably face headwinds. Stocks remain a great inflation hedge but may have lower returns due to the market’s strong performance in recent years. Stocks to consider this year could include those that benefit from rising rates and inflation, including value stocks and real estate. As rates rise, traditional bonds tend to face risks. The key is to mitigate this risk by investing in short-term bonds or other strategies that may not be as sensitive to changes in interest rates.
  • Other asset classes may naturally do well in this environment. Floating-rate loans tend to fare well when rates rise because their yields adjust upward. Treasury Inflation-Protected Securities (TIPS) are specifically structured to perform well when inflation readings are higher than expectations.

At RegentAtlantic, we will continue to monitor your portfolios and advise you on strategies that might be helpful to fight inflation. If you have any questions, please contact your RegentAtlantic Wealth Advisor.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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