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All Aboard the Inflation Train: Portfolio Strategies To Stay On Track and Not Derail

Why rising inflation is a concern for investors

Inflation headlines are as common as red lights on roads lately. The word itself – “inflation” – seems to spark more fear than a potential market downturn, causing panic that financial factors could be outside of our control for the foreseeable future. However, a realistic look at where we are today compared to other points in history should dispel such fears and remind us that this is likely not the end of the world as we know it but rather a natural part of the cycle for which we prepare.

Investors of the late 1970s might be a bit more sensitive to current inflation news than others, but the stratospheric levels we saw extend into the early ‘80s are not where we expect to go. As the folks at Schwab point out, that time was a “unique event in modern history, driven by a change in the structure of exchange rates, demographics, oil price shocks, expansive fiscal policies, as well as monetary policy errors.” Those are different circumstances than we face today. That said, we are seeing factors that have kept inflation low ebbing, and the 2% to 3% inflation range represents a change from where it has been since the financial crisis of 2009.

When the global pandemic hit hard, companies cut production because demand plunged and was forecasted to remain low. The economic rebound post-vaccine distributions has been faster than expected – leading to production shortages and higher prices.

Inflation in simple terms is a sustained rise in overall prices levels – not simply the rise of prices. During economic growth, a degree of inflation should be expected because demand increases beyond the supply of goods, producers raise their prices and inflation increases. Inflation’s causes are still argued among economists, but it’s generally accepted that there are two types:

  • Cost-Push: This is an increase in what we pay for basic goods like oil or lumber. Our ability to spend on shopping, entertainment and restaurants, which promises continuing economic growth, diminishes because we have less in our pockets after paying for life’s necessities.
  • Demand-Pull: This happens when overall demand in our economy rises faster than goods can be delivered to shelves, cars to dealership, parts to manufacturers, etc. Combined with a rising money supply into economies (such as current pandemic relief programs) the inability to increase production of goods to meet demand drives prices up.

Both scenarios are based on demand outpacing supply in the economy or “too much money chasing too few goods.” When the demand for goods and services is greater than the economy’s capacity to provide them, prices will rise, and there is less in our pockets.

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