Increasing Inflation, and what it means for Investing: At 5.0% as of May 2021, inflation is running at the highest level since 2008. So what does this mean to you as an individual investor? In 2020 the buzz was about Interest rates – whether they would be increased or decreased or held stable. In 2021, the news is about the other I word: Inflation. An increase in inflation means that we are currently paying more for goods and services than we were last year. Or in other words, a dollar is worth less this year. For investors it underscores the need, even more so than before, to be invested in the markets and generating returns, and to not hold a lot of un invested cash on the side-lines.
There are three primary reasons why the inflation rates have increased dramatically:
1. Inflow of cash into the economy from generous government stimulus checks
2. An explosive increase in consumption from pent-up demand during the COVID-19 pandemic (travel, entertainment etc.)
3. Low interest rates set by the Federal Reserve
So what does all this mean for the third I – Investing? Stocks are a good long-term vehicle for hedging against inflation. Companies are able to charge more for their goods and services and that pricing power is expected to raise the profitability of the strongest companies. In particular, Value stocks (those with “bargain pricing”), are expected to do better in this environment.