January 2023
What is inflation and how does it actually impact you?
Inflation is the rise in prices on everyday goods and services. It’s measured using the Consumer Price Index (CPI), which gathers data from more than 200 categories (e.g., milk, coffee, gas, rent, furniture, jewelry, etc.) and is arranged into eight major groups (food and beverage, housing, apparel, transportation, medical care, recreation, education and communication, other goods and services).
The data collected through August has inflation running at an increased rate of an astonishing 8.3% changeover the past 12 months, making it the highest increase since the late ’70s and early ’80s.
To be clear, inflation is not 8.3% for everyone. Because the CPI measure hundreds of different goods and services, how the cost of those good and services will impact you will be based on your needs and the things that you use the most. One important example is the inflated cost of housing. The housing measurement is comprised of rent and owners’ equivalent rent (how much an owner would pay in rent to equal their cost of ownership), and it won’t apply to you if you own your home and have a fixed mortgage. The housing number makes up 32% of the CPI calculation, so if it doesn’t apply to you, the impact of inflation would immediately be less than what’s being reported. And if you don’t smoke or drink alcohol, you can eliminate over 1% of the index. Maybe you own your car and are not in the market for a new or used vehicle—eliminate 8% of the reported index. However, if you drive more or fly more, those things will have a larger impact on you than other people who do those less. The main point is that everyone has a personal inflation rate that may be different than the overall rate measured by the CPI.
So what should you do to prepare financially?
Given the increase of uncertainty during this period of high inflation, it may make sense for you to revisit your budget and financial plan. By arming yourself with knowledge around how inflation will impact your financial plan, you may find that you don’t have to worry as much as you thought. Think about how nice it would feel to be able to ignore the media pressures that the world is ending. Confidence in having a plan and being empowered to stay the course can be the most important action to take.
In addition, if the cost of living is going to be more for an unknown period of time, it’s important to separate the costs of your needs from the costs of your discretionary spending. It may mean making the unpleasant decision to cut back on travel, driving, eating out or other activities within your control to make room in your budget for the increased cost of necessities, like rent or insurance.
You’ll also want to revisit your emergency savings. If in an emergency you need an increased amount of money, you should consider saving more to prepare for the unexpected. The challenge with increasing your emergency savings account is that the value of your dollars sitting in the bank is being eroded away by high inflation. It is crucial to review your potential short- and mid-term needs and consider using conservative investment vehicles like Treasuries, CDs, or high-interest savings accounts to manage liquidity and squeak out the highest possible interest, minimizing the impact of inflation on your cash.
And from an investment standpoint, what assets perform well in an inflationary period?
Seeking investment opportunities outside of the traditional markets is key. Owning real assets should be a priority during inflationary periods. Historically, some of the best assets to own have been real estate with rising rental opportunities, gold, and private lending opportunities collateralized by real assets. If you are able to touch and feel it, you have something that you can sell when times are tough to protect your investment.
The major challenge in this environment for investors utilizing traditional assets (stocks and bonds) is that those assets are being impacted negatively by inflation as well as rising interest rates at the same time. If stocks are an appropriate asset for your portfolio, there are a few sectors that tend to perform better during inflationary periods that should be considered: energy, healthcare, financial companies, agriculture and consumer staples. These sectors can benefit from increased usage and pricing, but again, like all businesses, they are really battling increased interest rates at the same time. Like with any investment strategy, there are pros and cons, so it is important to be cautious and think about what makes sense for your individual financial plan.
As for the bond market, many investors will talk about and turn to TIPS (Treasury inflation-protected securities) for their “safe” money. These are government-issued bonds that are indexed to inflation, and thus, have an increasing value as inflation rises. They are not always as stable as you are led to believe, though, so be sure to educate yourself on the pros and cons of these as well and whether they fit within your overall strategy. Rising interest rates have made traditional bonds, specifically short-term bonds, attractive for the first time in years. Yields have moved into the mid- to high single digits, surpassing inflation in some instances, making the risk-adjusted return a very reasonable consideration.
So you have been worrying for nothing?
While worrying is completely understandable, it’s not usually the most effective approach to feeling better. Understanding what inflation means to you specifically and revisiting your financial plan and savings strategies are the best places to start. Is your job secure? Do you have any large planned or possibly unplanned expenses that may need to be recalculated? . Maybe revisit your mix of stocks and bonds and evaluate whether you should reduce your exposure in either of these categories. . You should also consider meeting with your advisor to see if alternative real assets make sense and if they can be added into your portfolio.
Remember that knowledge truly is power and focusing your energy into efforts that make a real difference can not only held reduce stress, but it can also avoid unnecessary worrying and wasted time. That is how you protect against inflation.
Disclosures:
This information is presented for educational purposes only and is not intended to constitute financial, tax, or legal advice. Morton Capital Management dba Morton Wealth (“Morton”) makes no representation that the strategies described are suitable or appropriate for any person. You should consult with your financial, tax and legal advisors to thoroughly review all information and consider all ramifications before implementing any transactions and/or strategies concerning your finances.
Although the information contained in this report is from sources deemed to be reliable, Morton makes no representation as to the adequacy, accuracy or completeness of such information and it has accepted the information without further verification. No warranty is given as to the accuracy or completeness of such information.
Past results are no guarantee of future results. All investments involve risk including the loss of principal.
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