Investment Strategy: The Impact of Inflation
The concept of inflation is as follows: prices rise over time, causing your money to lose some purchasing power. Read how an investor can fight inflation.
If you could buy a car in 1980 for $5,500 and a comparable make and model for $49,000 in 2022, that speaks to the change in purchasing power. Sure, your 2022 model probably has a nicer stereo and several other value-added gizmos, but for the most part, your $5,500 doesn't have the same purchasing power in 2022 that it had in 1980.1
In 2022, we're seeing inflation like nothing we've encountered in decades. It's risen above 8% at times, sending prices through the roof. Inflation is charted in part by measuring the changes in what consumers pay through the Consumer Price Index against the Producer Price Index, which measures the prices that producers receive for their products. Through this, the Federal Reserve finds that the rate that indicates ideal employment and prices is 2%. What moves the needle? There are a number of factors, including demand-pull inflation, where demand for a good or service increases, but the supply filling that demand stays the same, causing prices to increase. The opposite can also be a factor with cost-push inflation, where the supply of a good or service is low, causing the prices to go up.2
What can you, as an investor, do to fight inflation? The general strategy in this case is to weather the storm, which can be helped in some ways by diversifying your investments. This often means a combination of equities and bonds along with other products like REITs and TIPS. However, this typically only works if you are already invested as the inflation rises. Other investors take advantage of the more consistent returns of bonds in these periods. While it's true that the returns of bonds are more consistent than other investments, they are also much lower.1,2
Weathering high inflation periods can be difficult for investors, but sensible strategies and careful management may help you maneuver through the tumult. For help managing your investments, feel free to contact our team, California Retirement Advisors, at cradvisors.com or call at 888-643-7472 to schedule an appointment with a licensed advisor.
For more information on our economy, please watch this video by Economist Rodney Johnson.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.