Following a year of economic instability, it appears that many of us are turning our attention to something that’s been around for decades but has recently piqued national interest - inflation. In fact, a recent study found that people are Googling the word “inflation” at a rapid rate, with a peak not seen since 2008.1
Since the start of the COVID-19 pandemic, six major stimulus bills totaling around $5.3 trillion have passed. With these efforts to alleviate pandemic-fueled financial strife, are inflation levels being impacted?
Fed Chair Jerome Powell said this week that inflation could end up “higher and more persistent” than expected. This comes after the Federal Open Market Committee increased its inflation expectations for 2021 by a full percentage point. Powell also hinted that the central bank is potentially preparing for two rate hikes in 2023.
As you consider any potential changes to inflation we may be seeing this year, here’s a reminder about what inflation is and how it can affect you and your investments.
What Is Inflation?
Inflation is defined as an upward movement in the average level of prices. Each month, the Bureau of Labor Statistics releases a report called the Consumer Price Index (CPI) to track these fluctuations.
Understanding the Consumer Price Index
The CPI was developed based on information provided by families and individuals on purchases made in the following categories:2
- Food and beverages
- Medical care
- Education and communication
- Other groups and services
While it’s the commonly used indicator of inflation, the CPI has come under scrutiny. For example, the CPI rose 1.4 percent between January 2020 and January 2021 – a relatively small increase. A closer look at the report, however, shows the movement in prices on various goods tells a different story. Used car and truck prices, for example, rose 10 percent during those 12 months.3
Investments & Inflation
We are all fortunate enough to have access to the greatest inflation hedge ever produced… high-quality stocks as displayed by the S&P 500. It could be said that our largest risk as investors is to outlive our money rather than losing our money in the stock market, but that can be discussed at another time.
To demonstrate the best inflation hedge ever produced, consider this: If you were born in 1960, the S&P 500 traded at 58 at that time (that is not a typo, it was 58). Additionally, the cash dividend of the S&P 500 was $1.98. Fast forward to today, the market as the close on Thursday, June 17th was 4,221.97 and the current cash dividend is around $59. Had you invested in 1960, you would have more than 70 times your initial investment, now paying a dividend of 30 times higher.
If we look at how much inflation has gone up over the same time frame in comparison, we see that CPI has only gone up 9 times since 1960.
With so many changes over the past year or so, it’s no wonder investors and consumers are concerned about the rate of inflation today. When inflation is low, it’s easy to overlook how rising prices are affecting a household budget. And when inflation is high, it may be tempting to make changes to your financial standings and portfolio. If you’re concerned about the inflation rates we’re seeing in 2021, please reach out to us if changes need to be made or if you and your portfolio are already well-prepared.