Investing Basics: The Impact of Inflation

The Impact of Inflation

These days you can hardly turn the news on without hearing about inflation. The concept can be confusing at times, but at its most basic, it comes down to the following: prices rise over time, causing your money to lose some purchasing power.

If you could buy a car in 1980 for $5,500 and a comparable make and model for $49,000 in 2023, that speaks to the change in purchasing power. Sure, your 2023 model is WAY more technologically advanced, but for the most part, your $5,500 doesn’t have the same purchasing power that it had in 1980.

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.

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 assets like REITs and commodities.

Weathering high inflation periods can be difficult for investors, but sensible investment strategies and careful portfolio management can help you navigate this turbulent period successfully.

If you’d like help with, or need a second opinion on your portfolio, please contact us today.