Inflation has been a topic at the top of headlines for the last 6+ months. It is something that our team has had a close watch on, especially as we look at entering the final month of the first quarter of 2022. We have been getting a ton of questions about inflation with the Consumer Price Index (CPI) numbers coming in at levels we have not seen in nearly 40 years. In this article, I wanted to address some of the common questions we have been getting when it comes to inflation.

Do you think we need to worry about it for 2022?

“Worry” is a strong word, but it is something that we certainly need to keep an eye on. What we are really watching closely is how the Federal Reserve is handling interest rate hikes and bond purchase reductions. Getting both of these right is never an easy task. Currently, we do feel that most of what they are planning to do is priced into the market. But as record inflation continues, the narrative changes..

How will it affect investments and financial planning?

Similar periods throughout history, where inflation was high but interest rates were relatively low, have been good for the stock market overall. We have certainly seen this in the past three years. In periods of high inflation with low rates on the rise, we like to lean into investments like energy stocks, bank stocks and other commodities. Historically, all of these have performed well in these environments, and this time has been no different, as all have outpaced the general market over the past 6+ months. (Forbes)

Should people in retirement or looking to retire adjust their plans?

Sticking with the topic of high inflation and low interest rates, they have a huge impact on plans for retirees and pre-retirees. In the past, when interest rates were close to the 5-6% range, we would have had these cohorts in allocations that were closer to 50/50 or 60/40 stocks-to-bonds. But, with low interest rates and high inflation, these same clients are now having to invest in more stocks in search of a return to outpace inflation – somewhere in the 70/30 range. As things begin to normalize in the future, our hope is that inflation comes down, rates go up and these same investors can get their portfolios back to what they  have looked like in the past.

Are there any important inflation markers that we should watch for?

The biggest markers to keep an eye on are the CPI number and unemployment. These are the two numbers that the Federal Reserve keeps a close eye on to determine where interest rates need to be. The target rate for inflation is in the 2-3% range and for unemployment, the 3.5-4% range. These are what the Fed considers “normal.” Currently, unemployment does fall within the normal ranges, so what we are watching the closest is the CPI number. We do expect that this will run hot for the next 1-2 years, but the Fed has reiterated that they think it will normalize as we continue to come out of the pandemic and the supply chain worries ease.

Over the coming months, we expect inflation will stay in the headlines. It is something that we are keeping a close eye on for this year and into 2023. If you are a client of ours and have questions, do not hesitate to reach out. If you are not a client, but have questions, we would love the opportunity to meet you and discuss how we may be able to help you and your family plan for the future!

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Myles Zueger and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Leave a Comment