Year-End Inflation Update: How Does Inflation Look at the End of 2021?
As we close out 2021, concerns surrounding inflation - which is at a 40-year high - are top-of-mind for many. Americans are seemingly seeing rising prices everywhere they go, even as consumer spending increases and recovery in certain sectors continues. At the same time, the ongoing pandemic is contributing to a labor shortage as well as causing issues with the supply chain, and vaccine distribution has not been rolling out evenly and smoothly around the world - all of which is contributing to rising inflation.
How is inflation measured?
To consider inflation, the Fed looks at the Consumer Price Index (CPI). There are two types of CPI:
- Headline CPI, which considers all goods and services including food and energy, which has the potential to be very volatile.
- Core CPI, which excludes food and energy commodities. The Fed often looks at Core CPI due to the volatility of Headline CPI.
It’s important to remember that inflation will affect everyone differently as not everyone has the same financial obligations (for example, someone who has paid off their mortgage may not feel any pressure from supply chain issues with housing).
Short-term and long-term outlook of inflation
In the short-term, the Fed will likely raise interest rates in the coming year to moderate inflation. While commodities like oil are high right now, they will likely level out over time, the same way we saw with lumber earlier this year.
We expect that by 2023, inflation will calm, but that also depends on several factors – how quickly the vaccine rollout takes effect globally or how the supply chains will continue to be affected, for example.
We also know that the Fed, along with central banks around the world, will reduce their bond holdings in 2022, so investors may want to focus on short-term/duration bonds rather than longer-term/duration bonds.
Can inflation be beat?
When inflation rises, many investors want to attempt to preserve their capital by holding cash or Treasury bonds, but long-term, this is not a good strategy and can have a negative effect. Traditionally, stocks or real estate investments have been shown to be a better option when looking to balance your portfolio against the effects of inflation.
How will rising inflation affect my portfolio?
We understand that the effects of inflation can make investors nervous, but we will always consider your personal financial situation, and your risk comfort level, when discussing any changes to your portfolio. We recommend that you contact us today if you have any questions or concerns about inflation and the options available to you.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.