Investment Strategy: The Impact of Inflation

Investment discussions invariably touch upon the inescapable topic of inflation. While comprehending this concept may pose some challenges, at its core, it boils down to a fundamental notion: prices escalate over time, eroding the purchasing power of one's monetary holdings. For instance, contemplate the following scenario: in 1980, an automobile could be acquired for a modest sum of $5,500; yet, in 2022, a comparable make and model would command a staggering $49,000. This conspicuous shift vividly illustrates the deterioration of purchasing power. Granted, the modern iteration of the vehicle may boast superior amenities, such as an enhanced stereo system and other value-added trinkets. However, when one scrutinizes the situation, it becomes evident that the $5,500 in 1980 does not wield the same purchasing prowess in 2022 as it once did.1

In the annals of 2022, a peculiar form of inflation has emerged, unrivaled in its intensity for several decades. With sporadic surges exceeding 8%, it has catapulted prices to unprecedented heights, propelling the phenomenon into the realm of concern. The measurement of inflation is primarily accomplished through the juxtaposition of the Consumer Price Index (CPI), which gauges consumer expenditure, against the Producer Price Index (PPI), an indicator of prices producers receive for their goods. By scrutinizing these indices, the Federal Reserve discerns the optimal rate to maintain equilibrium in terms of employment and prices, which currently stands at 2%. What drives the inflationary pendulum? Multiple factors come into play, including demand-pull inflation, whereby a surge in demand for a particular good or service outpaces the supply available, subsequently inducing a price escalation. Conversely, cost-push inflation materializes when the scarcity of a good or service triggers a price surge.2

The pertinent question for investors, then, is how to effectively combat the perils of inflation. The overall strategy entails weathering the tempest, a feat facilitated by the judicious diversification of investments. This necessitates striking a delicate balance between equities, bonds, real estate investment trusts (REITs), Treasury Inflation-Protected Securities (TIPS), and other such instruments. However, it is worth noting that this strategy thrives most when investors have already positioned themselves in the market before inflationary pressures rear their head. Alternatively, some investors may elect to capitalize on the stable returns offered by bonds during tumultuous periods. While bonds indeed furnish more dependable returns compared to alternative investment avenues, their yields can be considerably lower.1,2

Enduring high inflationary epochs may pose considerable challenges for investors. Yet, by implementing prudent strategies and exercising meticulous portfolio management, one can navigate the turbulent waters with aplomb. Thus, the onus falls upon discerning investors to seize control of their financial undertakings, fortify their wealth, and embark upon a trajectory of safeguarded prosperity.