The first question is easy to answer partially: we are already seeing it. We can see it in food, gas, lumber, car prices, etc. There is debate on if this is a short-term blip or if there will be continued sustained rising prices. Each month we review the market’s expected inflation, which we define as US Treasury bonds minus TIPS (Treasury Inflation Protected Securities). Our last review shows the collective market’s expectation for 5-, 10-, and 20-year inflation to be between 2.2% and 2.4% over these time periods. This is normal to low inflation. While the market may not be right, people putting their money where their mouth is seems more valid than most writer’s opinions.
What are the ramifications to one’s investment portfolio? Over time, we know stocks provide the best hedge against long term inflation risk. Josh Bentz wrote a good blog post on this subject that can be found on our website at https://wealthpointadv.com/an-examination-of-inflation/, and in the post he shows stock market returns during the high inflation years from 1973-1984.
Spoiler alert: stocks did quite well. We know inflation is prices on the things we buy going up, and if companies can raise prices on goods and services and still sell the same amount, it makes sense their stock prices would rise due to their good financial performance. That has been the case so far in 2021 with excellent stock market performance. Having a diversified stock exposure is the key ingredient to long term returns that outpace inflation.
Featured in the July 2021 edition of The WealthPoint Word