Inflation reaches 40-year high: What does it mean for investors?
As inflation reaches record highs, here’s what experts say you should do with your portfolio.
US inflation jumped to a 40-year high, but that does not mean it will be a lost decade for investors, an industry expert reveals.
The larger than expected rise in the year-on-year consumer price index (CPI) released by the US Labor department shows the price of everything continues to rise, despite its central bank, the Federal Reserve (Fed) lifting rates by 75 basis points last month.
On a monthly basis, the US CPI increased by the most in nearly 17 years. This was off the back of rising food, shelter and energy prices.
According to Tiger Brokers chief strategist Michael McCarthy inflation is now “shockingly high”.
“This was both an increase on the previous month and above consensus forecasts, and directly contradicts notions that inflation has peaked,” he said.
With a record high interest rate traders are now expecting the Fed to lift rates by as much as 100 basis points during their next meeting.
The US market had a mixed reaction to the news.
“Support for beaten down tech shares eased some of the weight on stock markets.,” McCarthy said.
It is also having an impact on the energy market.
“Crude oil prices fell away as weekly inventory data showed weaker demand for gasoline, and energy share prices could come under pressure in trading today,” he continues.
Why it won’t be a lost decade
Despite all the doom and gloom, experts suggest this is unlikely to be the 1970s all over again. That decade was market by stagflation, a period of stagnate growth and rising prices.
But in the short run, volatility is likely to remain high.
According to Vanguard’s senior economist Alexis Gray there’s a silver lining even if the markets are having their worst start since World War 2.
“Because of lower current equity market valuations and higher interest rates, our analysis is now projecting slightly higher long-term returns in comparison to previous modeling,” Gray states.
This is leading to her firm increasing its 10-year annualized forecast by 1.5 percentage points in comparison to 2021 for both equities and bond investors.
At the same time AMP Capital’s chief economist Dr Shane Oliver said even with the current spike in inflation, it is unlikely to be as volatile and uncertain as the period between 1969 and 1982 was – a period that saw the US enter recession 4 times.
“So, while inflation may not go back to pre-pandemic lows and the longer-term tailwind for investment markets from ever lower inflation and interest rates may be behind us, a full on return to the 1970s malaise looks unlikely,” he said.
But he does concede inflation is bad news for investors as higher interest rates make cash more appealing, the economy remains uncertain, and for shares a reduced quality of earnings as firms tend to understate depreciation when inflation is high.
“All 3 mean shares tend to trade on lower price to earnings multiples when inflation is high, and real growth assets (like property) generally tend to trade on higher income yields,” he said.
What if inflation remains?
It’s worth pointing out that experts have differing views on the damage inflation could do to your returns.
According to US investment giant Blackrock we are entering a new phase with central banks remaining less supportive of markets.
As such it said inflation will “last for years” and you shouldn’t buy the share market dip.
“We could go back to the volatility seen in the 1970s,” Blackrock’s report said. “This regime is not necessarily one for ‘buying the dip’. Policy will not quickly step in to stem sharp asset price declines.”
Remember, time in the market beats timing the market
Vanguard is also quick to highlight that even with falling markets and 40-year-high inflation, the “need to do something” could be hurting you over the long term. Ready to open an account or considering a new broker? Find the best online brokers for your needs. Or check out fees and features in our comparison table to find a better deal today.
Gray points out this is because timing the market is incredibly different with the best and worst trading days often occurring close together and irrespective of the overall market performance for the year.
“The data from the last 3 decades has a clear message for investors – even a bad year for markets can deliver some of the best single-day returns an investor will experience in their lifetime,” she concludes.
Ready to open an account or considering a new broker? Find the best online brokers for your needs. Or check out fees and features in our comparison table to find a better deal today.
Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money.
Finder is not an adviser or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.