This Time It Could Be Different (Really)
Today, the Fed—which acknowledged in July that inflation was running hotter than it expected—believes the current spasm will be short-lived. If the Fed is right, the recent spike should subside in the months ahead, particularly once supply-chain bottlenecks adjust to the sudden re-opening of the US economy and to the demand surge fueled by excess savings and stimulus checks.
There’s already some evidence the Fed may be right. Lumber prices, which soared in April 2021 and made new homes less affordable, have come down almost as fast as they rose. Other commodity prices are also subsiding.2
But if the Fed is wrong (as some economists argue), inflation could stick around for years to come.
Your Inflation Playbook
If inflation suddenly gets out of hand, the Fed may be forced to raise interest rates or cut back on the bond-purchase program it’s been using to help stimulate the ongoing recovery. Higher rates could be especially painful for growth stocks, raising costs and eating into profit margins.
In an economic environment that involves higher inflation and continued growth, investors may flock to traditional inflation-protection hedges, including: industrial metals commodities, emerging-market currencies, inflation-linked bonds, or natural-resource equities.
Value stocks tend to perform better in inflationary environments since companies paying high dividends are those that stand to gain the most from a strengthening economy. Savers and bond investors could also see better yields on fixed income and savings deposits.
It’s understandable if you might feel unaccustomed to thinking about rampant inflation (unless you’ve been binge-watching re-runs of “That ‘70s Show”). But like it or not, inflation is back. Now would be the good time to speak with a financial professional who can help you devise a strategy to keep pace with whatever inflation we face in the future (see FIGURE 2).