Drawing from history to help lessen inflation’s impact on investors

This is the tale of two investors: One who experienced the widespread inflation that lasted from 1973 to 1982 and the other who didn’t but may remember a brief and fairly centralized inflation period in 2008.

Unfortunately, after months of this most recent spate of inflation, those more experienced investors are realizing they haven’t fully healed from their first encounter with inflation and aren’t appreciating déjà vu as they are either nearing or already in retirement. For those newer investors, they aren’t sure what to expect, how to react or where to put their money. Many may not even understand what causes inflation or how it may be affecting their investment strategy.

The probability of a recession continues to increase due to the impact of policy decisions to combat inflation. We won’t really know immediately if or when we’re recession, until it’s confirmed by the data. Regardless, the combination of higher inflation and slower growth is doing investors no favors as no one knows how long it will take for inflation to normalize or the impact it will have for years to come.

For the most part, inflation is the rate of increase in the prices of goods and services over a given time, resulting in a decline in purchasing power, which means spending more for something than you did before. It’s perfectly normal for there to be an annual inflation rate. In a healthy economy, it’s around 2%. The Bureau of Labor Statistics monitors fluctuations with the consumer price index (CPI), which it issues monthly. The CPI measures the average change in the prices for “a market basket” of consumer goods and services. In 2021 and 2022, the CPI’s annual inflation rate was 7% and 6.5%, respectively. The highest it has been since 1981, when it hit 8.9%.

Prior to this inflationary period, the leading culprit for more recent periods of inflation was oil prices. Today’s inflation was caused by multiple factors — energy was a contributor and not the primary source. Rather, there’s a direct line to the federal government pumping money into the economy in an effort to stabilize it as COVID-19 raged. Supply chain delays that started during the peak of the pandemic are improving, but still causing disruptions, especially for homebuilders and carmakers. Pent-up consumer demand continues unabated. We did see gas prices rise due to the war in Ukraine and sanctions on Russia which decreased the supply and increased prices, particularly for European nations. Altogether, these components are pushing prices higher and higher. And though it seems it should be good news that the employment market is strong, it’s not good for inflation because it means even more people are spending money.