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Writer's pictureJim Richter

Should I Care About Inflation in 2021?


Following a decade of subdued inflation, it appears that investors are shifting from an attitude of indifference, to having it at the top of their list of concerns. A recent study found that people are Googling the word “inflation” at a rate that has not been seen since 2008. (1)

Since the start of the COVID-19 pandemic, six major stimulus bills totaling around $5.3 trillion have passed. With these efforts to alleviate pandemic-fueled financial strife, how will inflation be impacted?


Fed Chair Jerome Powell has said that inflation is likely to pick up as the economy recovers from the pandemic, but he believes it will be temporary. Powell has also stated that the central bank plans to keep short-term rates anchored near zero through 2023. (2)


As you consider the potential shift in inflation, here’s a brief summary of what it is and how it can affect you and your financial situation.


What Is Inflation?


Inflation is defined as an upward movement in the average level of prices. Each month, the Bureau of Labor Statistics releases a report called the Consumer Price Index (CPI) to track these fluctuations.


Understanding the Consumer Price Index


The CPI was developed based on information provided by families and individuals on purchases made in the following categories: (3)

  • Food and beverages

  • Housing

  • Apparel

  • Transportation

  • Medical care

  • Recreation

  • Education and communication

  • Other groups and services

While it’s the commonly used indicator of inflation, the CPI has come under scrutiny. For example, the CPI rose 1.4 percent between January 2020 and January 2021 – a relatively small increase. A closer look at the report, however, shows the movement in prices on various goods tells a different story. Used car and truck prices, for example, rose 10 percent during those 12 months. (4)


Investments & Inflation


Inflation can affect investments in several ways. Most notably, it can reduce the rate of return, risk purchasing power and influence the Federal Reserve.


Rate of Return


Inflation reduces the real rate of return on investments. Say an investment earned six percent over a 12-month period. During that time, let's say inflation averaged about 1.5 percent. That would mean that your investment’s real rate of return would have been 4.5 percent, because the first 1.5% of appreciation simply kept pace with inflation.


Purchasing Power


Inflation puts your purchasing power at risk. When prices rise, a fixed amount of money has the power to purchase fewer goods and services.


The Federal Reserve


In addition, inflation can influence the actions of the Federal Reserve. If the Federal Reserve wants to control inflation, it has several ways it can reduce the amount of money in circulation. Hypothetically speaking, a tighter supply of money means less spending - which could equal lower prices and lower inflation.

But that is not what is happening today! With the 29% increase in the money supply in the last thirteen months, it’s no wonder investors are concerned about inflation.


When inflation is low, it’s easy to overlook how rising prices affect a household budget.

But when inflation is high or anticipated to rise, it’s scary to think about the potential negative impact on your portfolio and your future spending power.

If you’re concerned about the inflation that we are likely to see with the increasing money supply, Monotelo Advisors can serve as your trusted advisor and help you determine if changes need to be made to your financial holdings or if you are already well-prepared.


Sources:


This content is developed from sources believed to be providing accurate information, and provided by Monotelo 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.


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