Is Inflation Heading Higher?
Hello. I'm Laura Rotter of True Abundance Advisors.
Today we're going to try to address the question: is inflation headed higher? If you read the newspaper, if you watch the news, you know that all the pundits are attempting to answer this question. Now, we can certainly say that short-term inflation has been headed higher. In June, both the consumer price index (the cpi) and the producer price index (the ppi) were reported, and the year over year increase in inflation for both of those numbers were the highest in over 10 years. And this certainly isn't surprising.
I mean, we all know in 2020 the economy basically shut down and as we've gradually started to reopen from the closing due to the pandemic, of course there's been stops and starts in terms of availability of workers, in terms of availability of materials, so that we've seen price increases in various items, ranging from electronics to cars to restaurant meals. But this begs the question: is this just a short-term blip, because of this need to ramp up as we reopen, or is this something more pervasive, is this something that's gonna last? And it's an important question to answer because indeed, if we do think it's going to last long term, then we can expect interest rates to increase over time and when interest rates increase over time we can expect both the prices of the stock market and the bond market to decline.
So the question is: is this now an upsurge in long-term inflation? And the answer is: nobody knows! But there are some things that we do know. We do know that the stock market is a discounting mechanism. That is to say, that any news that's already publicly known and available should already be reflected in the prices of the overall market. So the market has already discounted the fact that the short term, that June ppi and cpi prices were up dramatically. Another thing about the stock market is we are rewarded for the risk that we take. The future is always unknown and so the fact that we get higher returns by investing in equities of stocks in companies both here and around the world is what enables us, the risk that we're taking, the uncertain future is what enables us to get this return. And so over time long-term holdings in the stock market should outpace inflation. We should be rewarded, with the risk of uncertainty, with the return greater than the inflation rate.
So I'd like to conclude with a great quote from Mark Twain. He said: "it ain't what you don't know that gets you in trouble. It's what you know for sure that just ain't so." So, the important thing is not to make knee-jerk reactions in your investing. If you make big moves now to hedge against inflation, you could lose big if the inflation turns out to be temporary. If you have any questions, please reach out to ask me. I'd be happy to work together to put together a plan and a portfolio to meet your needs and your goals in the coming years. So, please go out there and live your life on purpose!