The topic of inflation is often one of the most misunderstood topics among investors. It can spur emotions that can often appear highly subjective and largely speculative. Part of the reason for such emotion is that investors have a direct connection to inflationary pressures in the form of grocery shopping, going to the gas station, or even booking a vacation. The second reason, however, stems from the amplified financial news coverage of inflation at a single point in time. The most recent reading of the Consumer Price Index (CPI) is magnified, and intensified, in a way that provides no long-term perspective to the prospects of inflation – it is merely coveted as a startling extreme. It also ignores the fact that appropriate inflation is a necessary component of economic growth and innovation. One such magnified example became apparent with the initial April and May 2021 CPI annualized figures of 4.20% and 5%, respectively, which has now expanded to 6.20% for the month of October. The near-term shock factor is apparent, yet we urge investors to remain objective and assess the data with a wider lens. For better perspective, see below for the growth of $1,000 since 2011, as compared to the actual observed inflation relative to the Fed’s intended 2% annual target. Also, special attention should be placed on the transitory and idiosyncratic factors that have impacted CPI this year. The historic consumer pent-up demand – post-COVID – has transpired amidst the worst supply chain issues in over three decades. The mere fact that we can objectively quantify the reasoning for why inflation has jumped to such levels is a notably more reassuring fact than most care to focus on. The reality is that inflation is likely to remain elevated through 2022 and may moderate to normal levels following supply chain resolutions. The Fed’s reactions in 2022 will also provide critical clues on the path of inflation. No matter the outcome, however, equity market participation has historically provided the best long-term insulation to inflationary pressures relative to other asset classes.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management