- Why inflation isn’t necessarily bad
- How different asset classes perform when inflation is on the rise
- What you can do to protect a portfolio from inflation but still hit a target outcome
US inflation figures recorded the biggest rise in mid-2021 since 2008, and this has compounded the nervous chatter about rising inflation that we have been hearing over the first half of the year.
Central bankers in the US repeatedly played down the threat of higher inflation with a “it’s just transitory” mantra…until the US Federal Reserve meeting mid-June, when there was a marked change of rhetoric.
To cut through the ‘noise’, we think there are three things you should be talking to your clients about: inflation may be coming, but it’s not necessarily bad; how different asset classes perform in an inflationary environment; and what you can do to protect your portfolio from inflation but still hit your target outcome.
Inflation is coming…
…well, maybe, but a little inflation is not necessarily a bad thing. In their mid-June meeting, the US Federal Reserve (Fed) changed their future expectations of inflation, with an earlier timeframe for interest rate hikes. This caused a sell-off in markets, but this instant alarm is misplaced. Since the Global Financial Crisis of 2008, markets have got used to an ultra-low inflationary environment but the Fed’s target rate has remained at 2%, indicating that it has been a struggle getting inflation high enough in the face of secular trends. Zero inflation is not good for economies; businesses are not as profitable, wages stagnate, and consumers have less spending power. Of course, very high inflation is also not good as it erodes the value of profits and savings.