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How Reliable Is Inflation Data for Investors Heading into 2022?

What factors are driving inflation? How can we prepare? Putting a plan in place now can help you prepare for inflation sooner rather than later.

By Hilary Hendershott, CFP

"Inflation Spurs Growing Gloom in the Markets"

No, that headline wasn't bannered across TheStreet, CNN Money, or MarketWatch this week. That was the headline of an article featured in The New York Times on May 17th...1970.

The leading cause driving inflation over fifty years ago? Tight finances, an uncertain economic future, social unrest, and uneasiness over the U.S. military's involvement on the other side of the world.

Doesn't that sound like 2021? Add in a global pandemic that continues pushing its effect well into its second year and I think we're all still on edge a bit.

We're well past the days of deflation dominating headlines. Inflation is now rising for U.S. consumers. Airlines are back to booking flights to full capacity. Restaurants with full dining rooms are still struggling to hire waitstaff and line chefs. No surprise, but airfare and steak dinners are costing quite a bit more now than even a year ago. Stock prices for key airlines and hospitality giants are surging well over 100% gains from spring 2020. Is this a good or bad thing? It depends on where you are on the economic food chain.

Yes, much of this was expected, especially after such a massive shift in GDP (decline and spike from Q2 to Q3 2020) and the COVID-19 pandemic's effect on the global economy. That said, how much can we reasonably expect inflation to rise heading into 2022? To answer that question, we need to look at some of the key players (read: factors) who are impacting the change in inflation.

Key Factors Influencing Inflation Heading into 2022

Inflation expectations have been on the rise for months. In fact, according to a recent report from CME Group’s FedWatch program, market participants are betting that inflation will average slightly more than the Federal Reserve’s long-term target of two percent over the next decade.

Here are the main factors that will impact how inflation changes heading into 2022:

  • The U.S. Federal Reserve's monetary policy 
  • Unemployment rates around the world 
  • A clogged supply chain and hyperinflation in key regions of the world

These three factors, among others, have an enormous influence on how quickly prices rise or fall. The obvious elephant in the room is that we as a society are uncertain what additional measures may be imposed heading into cold and flu season and the winter weather to help stem the tide of COVID-19 cases.

Regardless of the reasoning behind new restrictions, if any, the market tends to respond negatively to fear and uncertainty. Let's take a look at how each of these factors is impacting inflation heading into 2022.

How the Federal Reserve is Responding to Inflation for 2021 (and Beyond)

The Federal Reserve is projecting a rise in inflationary pressures. We can see this both from how Fed Chair Jerome Powell and the FOMC (Federal Open Market Committee) are responding to these projections as well as how they're adjusting policy accordingly.

Only two years ago, the New York Times reported, “Federal Reserve officials are increasingly worried that inflation is too low and could leave the central bank with less room to maneuver in an economic downturn.” Just a few short months ago, the Wall Street Journal seemed to 'break glass in case of emergency' with this headline "Everything Screams Inflation." I appreciate the subtlety.

The author, James Mackintosh, is not naive in his role as a financial columnist. His words were carefully crafted to snatch even the most passive reader's attention: “We could be at a generational turning point for finance. Politics, economics, international relations, demography, and labor are all shifting to supporting inflation.” What does that look like on a practical level? The conversation essentially starts and stops based on what Congress needs to do moving forward.

You can also expect to hear about a looming default on the U.S. debt in the coming days and weeks as Congress argues over raising the debt ceiling. Without raising the debt ceiling, the U.S. government allegedly runs the risk of defaulting on its debt - an unprecedented step that could signal a massive hit to the U.S.'s economic health.

How Unemployment Factors are Influencing Inflation for 2022

Businesses are under pressure to raise wages as unemployment payouts keep incentivizing many workers to stay home and 'apply' for jobs. How much does that actually affect inflation? With higher prices at the pump and on the plate, businesses are seeing their margins shrink with cost-of-goods rising and nominally affordable help hard to find.

Base economics tells us that unless there is an eventual removal of economic subsidies (read: stimulus), wages will continue increasing and unemployment will stay largely the same. Combine the cost of rising wages with the already strained supply chains around the world, along with governmental controls on supply materials, and it’s not hard to see the increased effect on inflation heading into 2022.

Is Global Hyperinflation Driving Inflation in the U.S. Heading Into 2022?

"Hyperinflation" isn't exactly a conversational term, so let me do what I do best and give you a clear, non-jargon-y explanation. Much like the name suggests, hyperinflation takes an expected rate of inflation and essentially moves into overdrive depending on your geolocation, period of time, external factors (the overall health of other world-leading state economies, like China, the U.S., etc.), and other pressures.

Think of it like someone driving fast on a winding road and then, it starts raining hard. And temperatures are below freezing. Now, an already risky situation is riskier, maybe even dangerous, and can cause a crash if you're not careful. That's the similar effect of hyperinflation on a global scale.

Goods that cost a certain amount pre-pandemic were slowed in the import process due to COVID-19 concerns. Slower processing through customs meant a higher transportation and load wait time for shipping entities. Those costs get passed on to the purchaser who then passes those expenses on down the line until the end consumer pays the added cost in the checkout line.

The good news is the U.S. has seen its fair share of inflationary periods over the past hundred years. Inflation during the Jimmy Carter administration grew to nearly 14 percent. That was less than 50 years ago, and we've seen two entire generations come into the workforce since inflation was that high. The key is knowing how to position your mindset and portfolio, such as having an evidence-based investment plan, regular communication with your financial advisor, and protecting your portfolio against emotionally charged decisions.

How Can Investors Approach Inflation When Planning for 2022 and Beyond?

For starters, the stock market's job is to balance positive information against negative information. Exciting new product launches are balanced against falling profits. Sales gains are tempered by rising tax bills. Wars, lower interest rates, natural disasters, greater dividends - these all balance together, back and forth, to set daily prices that buyers and sellers believe to be fair.

If inflation truly does rise into the future, how may you need to adjust your approach to investing to accommodate inflation? Some investors may believe in hedging against higher inflation while others may try to 'time the market' to try to get ahead of market trends. This should go without saying, but that approach is not a reliable strategy, and in fact, that's not investing - that's speculating, an unwise approach.

Some examples of how investors can prepare for or hedge against inflation moving into 2022 include:

  1. Ensure you’re following a smart approach to asset allocation by trusting a diversified portfolio. That may include at least some assets that perform better than others during inflationary times. Some of those assets could be TIPs/CIPs, real estate ETFs/REITs, gold, silver, precious metals, and other commodities, and stocks potentially less sensitive to inflationary pressure. 
  2. Consider refinancing your property to take advantage of current low-interest rates. 
  3. If individual stocks are owned, it’s important to evaluate holdings that are most exposed to inflation or whether you may want to avoid adding more to the position.

It's hard, if not impossible to make good investment decisions without knowing where you stand financially. When you're trying to figure out how to invest in inflation, it's important to know your numbers:

  • How much is your current income? What are your current expenses? 
  • What do you believe will happen with both your income and expenses over the next five years? 
  • Is your current portfolio balanced between taxable and tax-deferred accounts?

Knowing your numbers now can give you a baseline of understanding what you can reasonably expect for 2022 and beyond, whatever level of inflation we may experience.

Preparing for Inflation

Closing the loop, after the New York Times published the May 17th, 1970 article about inflation, the S&P 500 Index returned 32.23%. Inflation doesn't have to spell doom and gloom for investors. In fact, with the right financial advisor and a solid plan customized for your exact investing needs, this next year may be a great opportunity.

Inflation is a natural by-product of an ever-evolving market. Whatever tomorrow holds, inflation and deflation are designed to affect how your money performs for you in the future. Putting a plan in place now can help you prepare for inflation sooner rather than later.

About the author: Hilary Hendershott, CFP®

Hilary Hendershott is the founder of Hendershott Wealth Management, Investopedia Top 100 Financial Advisor, and Top 40 Under 40 Entrepreneur in Silicon Valley. Her insights have been featured in the Wall Street Journal, NBC, ABC, FOX, DailyWorth, Forbes, and Investopedia. Hilary is also a CERTIFIED FINANCIAL PLANNERTM, host of the Profit Boss Radio® podcast, author, and TEDx Speaker. Connect with Hilary at hilaryhendershott.com.

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