By: Ryan P. Johnson, CFA, CFP® - Director of Portfolio Management & Research
Inflation concerns are rising. So, for this newsletter, we will focus on consumer inflation and the CPI, or Consumer Price Index. There are many variations of CPI, including month-over-month, year-over-year, seasonally adjusted, and with or without food and energy prices. For this writing, we will only highlight the year-over-year, more often used inflation figure (not seasonally adjusted, All Urban Consumers), which was 4.2% at the end of April. Just two months ago, this reading was under 2%. In May of 2020, it was barely above zero. Housing is the largest component (over 40%) with Transportation (over 15%) and Food (over 15%) as the next largest pieces.
The underlying causes of inflation are too little supply and/or too much demand. One example of demand change is event-driven: last year’s dip in gasoline prices came from lower demand, as driving dropped dramatically due to COVID lockdowns in 2020. But energy prices can be volatile; gasoline prices are now back to the same level as three years ago. Another type of demand change is driven by monetary policy and government stimulus. With the Fed (Federal Reserve) keeping interest rates low, more borrowing occurs, which leads to higher spending. With several rounds of direct government stimulus sent to businesses and consumers over the past year, spending is higher than it would have been otherwise. This increased demand is meeting limited supply in some areas, causing much higher prices. Semiconductor chips are a prominent example.
As a consumer, inflation erodes your purchasing power. Currently, the Fed is more concerned with employment than inflation. The Fed is purposefully staying “behind the curve” and is allowing inflation to run above average for a time, which is a change from past business cycles. For at least the next several months, we expect above-average inflation readings due to low year-over-year comparisons.
So, should investors be worried? Historically, owning physical assets and stocks have helped investors keep up with, or outpace, inflation. We are increasing our focus on companies with pricing power. If higher inflation results in investors demanding higher bond yields, this will cause lower bond prices. We continue to avoid long-term bonds that could lock in low yields. Outside of stocks, we have increasingly utilized alternative funds, which provide further diversification. Having direct commodity exposure, like buying gold, may be good for a trade, but is not what we would call an investment. We will continue to work hard to help you save, grow, and protect your wealth.
As we continue to grow, our focus remains on one family, business, or foundation at a time. We would love for you to send the link below to your friends and family, so that we may assist other successful business owners and individuals with their financial needs: https://mybuckingham.com/contact. We appreciate your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Director of Portfolio Management & Research
RISKS AND IMPORTANT CONSIDERATIONS
News and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.