Gerard O’Reilly in Reuters: Investing When Inflation Is a Mystery

Trying to outguess financial markets on the outlook for inflation is futile. Investors are better off using market gauges of consumer price expectations and focusing instead on how to outpace, or hedge against, the harmful effects on future spending that such measures imply.

The past three decades have been a period of relatively moderate inflation in the United States with the annual increase in the consumer price index averaging around 2.3%. Yet the impact of even this amount of inflation has been to reduce the purchasing power of an uninvested dollar by around half. It therefore matters a lot whether the recent pickup in the pace of price rises is transitory, as Federal Reserve Chairman Jerome Powell predicts, or more enduring.

Short bursts of high inflation have a much lower impact on purchasing power than sustained periods of high inflation. But last year’s Covid-19 shock to the labor market and supply chains means that it’s hard to know whether the economy is experiencing the former or entering a phase of more prolonged price pressures. Market measures of investors’ inflation expectations point to a moderate pickup in consumer prices in the coming years but are aligned with Powell’s view that a recent spike higher will prove transitory. For example, data from the Federal Reserve Bank of St. Louis show that fiveyear breakeven inflation, which reflects inflation expectations over the next five years, is 2.6% annually, or near its 30-year average.

The collective best guess of investors as aggregated by market prices is hard to beat as a guide to what the future may hold. Investors may therefore be best off tuning out the pundits and figuring out how to either outpace or hedge against the inflation that’s already anticipated in market prices.

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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is registered as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”) with its primary place of business in the state of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. References to registration with the SEC do not imply any endorsement or approval of the qualifications of the firm, nor do they imply that the firm’s representatives have attained a particular level of skill or training. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

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