Inflation is all the rage after last week’s much hotter than expected inflation numbers and has created a bout of volatility in the markets. Our view remains that this period of higher inflation will be transitory, as many of the forces that have kept a lid on inflation over the past decade or longer are still in place. Things like technology innovation, globalization, the Amazon effect, increased productivity and efficiency, automation and high debt (which puts downward pressure on inflation) are all still firmly in play and should help keep inflation in check later this year and beyond.
Inflation eats away at the purchasing power of the US dollar. How should investors protect themselves if they are fearful this bout of inflation will stick around much longer than expected? If you are worried, investment in commodities, real estate, value stocks and Treasury Inflation-Protected Securities (TIPS) all could be nice places to find shelter from increased inflation. Real estate can gain value with inflation, while property owners can increase rent on tenants. Also, commodities historically do well when the US dollar is weak and higher inflation tends to push the US dollar lower. Look at various commodities today and you will see that many are near 52-week or even all-time highs.
Since 1950, the average annual inflation rate based on the consumer price index (CPI) has been 3.5%, while the S&P 500 Index has returned more than 9% annually. It might sound simple, but if you want to beat inflation over the long run, stick with stocks. But if you want to be more targeted, value stocks tend to benefit from higher inflation. Things like materials and energy should get a boost from higher commodities prices, while higher interest rates greatly benefit financials, all else being equal.
Staying disciplined to a long-term diversified portfolio, in line with your specific goals and risk tolerance, is the best way to ride this out.
Related: How Can You Invest with Confidence?