Inflation, Investing and You
This expression has been used to indicate irrelevancy until the conversation touches on inflation. In recent years, the price of eggs has become a key indicator of economic conditions and consumer sentiment.
Consumer spending drives over 70 percent of the US Gross Domestic Product (GDP). Increasing the cost of goods and services slows economic activity by limiting consumers’ purchasing power. While the presence of inflation can be equated with a strong economy, too much of it can have a negative impact.
Most consumers are familiar with the monthly Consumer Price Index (CPI) issued by the US Bureau of Labor Statistics, which measures the average change in the price of a "market basket" of consumer goods and services. Consumers keep an eye on CPI to see how high prices are rising on staples, like eggs, and investors are watching the economic indicator to determine changes such as Cost of Living Adjustments (COLAs) for Social Security recipients.
Inflation can also impact corporate earnings, which inform stock prices – the more profitable a company is, the more attractive it is to investors. Inflation can drive up production costs, reducing profits (and therefore, earnings). Also, should companies pass their higher costs along to the consumer, higher-end prices may force individuals and families to forgo buying that product or service…again reducing corporate profits.
Among fixed-income investments, high inflation can cause bond prices to fall. As interest rates rise, newly issued bonds with higher yields reduce the value of existing bonds offering lower yields, leading to a decline in market value.
Governments usually closely monitor inflation and have measures to help control it. In the United States, the Federal Reserve is charged with implementing monetary policies to help maintain a healthy inflation rate, which can positively affect an economy by helping to drive growth.
Inflation's Impact
Inflation can be problematic for retirees and others living on a fixed income. In a high-inflation environment, your money does not go as far. For investors focused on equities, inflation can negatively impact stock performance: Inflation is often accompanied by higher interest rates, which drives the cost of capital higher, making borrowing more expensive…and reducing a company's ability to finance upgrades.
That's why it is imperative to work with a financial professional with experience navigating diverse economic conditions, expertise in understanding how the economic environment affects investors at all stages of their financial journey, and access to a wide range of investment products to meet evolving situations. A financial advisor can offer key support in:
- Developing a well-thought-out and tax-smart income strategy that accounts for periods of high inflation and other economic impacts
- Providing informed guidance around asset allocation, investment selection and financial planning
- Ensuring investors stay the course in times of market volatility and economic uncertainty
Learn how to maximize resources and work effectively toward your financial goals. Connect with your SageView advisor or reach out to us to get connected.