Why is Today’s Inflation Concerning?
Sensible wealth management plans account for the probability of gradually rising prices. Over time, healthy economies grow faster than their inflation rates, thus increasing asset values. Right now, inflation has spiked to potentially unhealthy levels. By May 2022, rates soared to 8.6 percent, a 40-year record. Rising prices can undermine confidence, limit spending, and curb investments. Excessive inflation can erode purchasing power, slow economic growth, and reduce the value of assets and income. At the same time as prices for goods and services increase, the value of many investment assets will decline.
What Causes High Inflation?
Economists describe three drivers of inflation rates:
- Demand-pull: An increase in available money and credit can make demand outstrip production capacity, thus causing more competition for goods and services.
- Cost-push: Unexpected disruptions may increase production costs, resulting in higher prices without increased demand.
- Built-in: Built-in inflation occurs because people expect income and prices to rise over time.
All three of these drivers can occur at the same time. For instance, stimulus money and low-interest rates drove demand during the pandemic. At the same time, pandemic-related supply issues caused production shortages and delays. Meanwhile, workers naturally expected higher pay in response to increasing prices.
How Can Past Inflationary Periods Inform Future Plans?
During times of high confidence, investors flock to growth stocks because they believe the prices will continue to increase rapidly. The rapidly rising cost of these stocks may depend upon speculation more than value. In periods of high inflation and uncertainty, growth stocks decline as investors look for discounts and safe harbors. Value stocks, equities with higher dividends and P/E ratios, look more attractive.
Historically, inflation has also impacted some economic sectors more than others. For instance, many experienced investors consider real estate and energy inflation hedges. The demand for these essentials won’t necessarily wane just because prices increase. Inflation can also cut into the value of fixed-income investments, like bonds. These investments offer the same dollar amount of income, but the value of these dollars has shrunk.
When Will High Inflation End?
Eventually, past periods of high inflation have abated because of various factors. These may include government actions to increase interest rates or available money, unemployment, market corrections, or the natural easing of disruptive forces. According to CNBC, economists expect high inflation to continue through 2022 but begin to ease between 2023 and 2025. Wealth Management to Weather Inflation High inflation rates can spark negative consequences for the overall economy. At the same time, savvy investors can protect their wealth and even enjoy long-term benefits in multiple ways. At Bestgen Wealth Management, we help our clients develop solid and balanced portfolios that can take advantage of various economic conditions.
Contact us to let us know your financial goals and develop a plan to meet and exceed them.