It seems as if inflation has been biding its time. Since the financial crisis a decade ago, growth in prices and wages has been muted.1 However, many financial analysts believe that’s about to change.
A jobs report from early March revealed continued hiring and a moderate increase in wages. The stock markets welcomed the news, responding with higher performance.2 However, the markets experienced volatility throughout the rest of the month and into April as trade tensions between the U.S. and China escalated.3
While the market is no stranger to daily fluctuations, inflation levels have remained low — and thus, so have interest rates. That appears to be changing. On March 21, the Federal Reserve raised the federal funds interest rate by a quarter of a percentage point and maintained its already-stated forecast of two more quarter-point rate increases this year.4
There are two important things to consider when creating a financial strategy. The first is what’s going on in the economy and how it may impact your assets. The second is to consider any changes to your personal financial circumstances and long-term goals. It’s important to work with an experienced financial advisor who can help keep you informed of any economic activity that could impact your investment portfolio’s mix yet keep you grounded so that any changes you make are aligned with your long-term goals. Please schedule some time with us if you have questions or concerns about how the potential for increasing inflation and interest rates could affect your situation.
The following are some of the factors expected to contribute to higher inflation this year:5
- Tight labor market (i.e., more jobs than workers) could promote higher wage growth
- Rising prices on raw materials
- S. manufacturing growth increased at its fastest pace in three months at the end of 2017
- Supply of manufacturing materials appears to be waning worldwide
So what happens in the investment markets when inflation rises? Generally, economic growth produces higher prices, which bodes well for financial, energy and materials stocks. On the other hand, regulated industries such as utilities and telecoms do not have as much flexibility to increase prices, and therefore may be negatively affected.6
In the bond markets, Treasury inflation-protected securities (TIPS) tend to rise because their face value adjusts based on changes in the consumer price index (CPI). Note that this may make them more attractive than corporate bonds or other government notes in a rising inflation environment.7
1 eTrade.com. Jan. 12, 2018. “Jack Frost still nipping inflation.” https://us.etrade.com/knowledge/markets-news/commentary-and-insights/jack-frost-still-nipping-inflation. Accessed March 20, 2018.
2 St. Louis Post-Dispatch. March 9, 2018. “U.S. stocks soar on strong jobs report; inflation fears ease.” http://www.stltoday.com/business/local/u-s-stocks-soar-on-strong-jobs-report-inflation-fears/article_ca79880d-941c-5dc6-8f3b-ccc22e77134e.html. Accessed March 20, 2018.
3 Nathaniel Meyersohn and Danielle Wiener-Bronner. CNN Money. April 4, 2018. “Stocks surge back for big gain after plunging on China tariffs.” http://money.cnn.com/2018/04/04/investing/us-stocks-markets-china-tariffs/index.html. Accessed April 5, 2018.
4 Paul Davidson. USA Today. March 21, 2018. “Fed raises rates, keeps forecast for 3 hikes in 2018.” https://www.usatoday.com/story/money/2018/03/21/fed-powell-hikes-interest-rates-consumer-loans/444986002/. Accessed April 5, 2018.
5 eTrade.com. Jan. 12, 2018. “Jack Frost still nipping inflation.” https://us.etrade.com/knowledge/markets-news/commentary-and-insights/jack-frost-still-nipping-inflation. Accessed March 20, 2018.
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