Reality stings. In 2021, Fed Chairman Jerome Powell believed that inflation would be transitory. Now, high and persistent inflation has become a real risk for investors that cannot be ignored. As a result, your clients are looking to you for answers. You have probably already begun adjusting client asset allocations and are considering additional hedging strategies to help protect their portfolios.
Remember that counseling clients can be as important as guiding their portfolios. You can be a valuable resource to your clients now by helping them understand the current state of inflation and what they may expect in the future. This post should help your efforts.
- February 15, 2020 Nasdaq.com1
The CPI (consumer price index) hit an annual 40-year high in January 2021, weighing in at 7.5%. And its cousin, the PPI (producer price index), followed suit a few weeks later with a month-over-month increase of 1%, nearly double what economists expected and the second-highest of all time. The PPI rose 9.7% for the 12-month period, just shy of a record.
Together these two benchmarks highlight the seriousness of today's inflation. Your clients’ wallets are experiencing inflation’s impact daily through rising costs for products and services, as illustrated below.
Source: U.S. Labor Department; CNBC.com; Jan. 12, 20222
When Federal Reserve Chairman, Jerome Powell, referred to inflation as "transitory" in April 2021,3 there were reasons to believe he might be right. If the supply chain’s constraint could be solved and workers would fill the more than 10 million open positions, inflation might be reigned in.
Unfortunately, those events haven't occurred, and the Fed has reset expectations.
- Fed Chairman Jerome Powell - Wall Street Journal, January 26, 2022 4
With this new perspective that inflation may be here for a while, the Fed could raise rates six or more times in 2022, according to some observers, up from two to three rate hikes forecast in the Fed’s own “dot plots” in 2021.
The Fed's inflation-fighting strategy of raising rates is designed to increase the cost of borrowing and reward saving. The effect is to slow spending, reduce overheating in the economy, and ease inflation. Done correctly, the economy can grow at a more moderate, sustainable pace while giving consumers more spending power. In theory.
But the Fed faces headwinds, and its ability to reign in inflation may be limited not the least of which the is ongoing Russia-Ukraine situation and resulting economic impact. Changes in monetary policy take time to influence the economy. A couple of small rate hikes may have limited effect on consumer and corporate borrowing in the near term.
And while the Fed has successfully used rate increases to curb inflation in the past, this time may be different. The Fed is faced with the challenge of reducing its nearly $9 trillion balance sheet, which grew through Fed stimulus to help the world economy recover from the Covid-induced downturn of 2020 (and the financial crisis of more than a decade ago)and now the complexity of global sanctions and their impact on potential inflation.
So, while unprecedented uncertainty remains the word of the day for many investors looking for answers to the inflation puzzle, there are actionable steps you can take now to help protect your clients.
With the likelihood that today's high inflation may persist for some time, it is well worth your time to assess potential inflation-hedging assets that may help protect your client portfolios. Gold, commodities, and TIPs are often viewed as effective hedges. We believe you should also consider private multifamily real estate, noted for its historic inflation sensitivity. We will discuss and compare these different options in a future blog article.
In the interim, if you would like to learn more about the private multifamily real estate, please contact us today for a consultation.
Footnotes:
1https://www.nasdaq.com/articles/ppi-9.7-year-over-year-markets-up-on-russian-troop-drawdown
2https://www.cnbc.com/2022/01/12/consumer-prices-continued-to-rise-in-december-reaching-a-40-year-high.html
3https://www.cbsnews.com/news/interest-rates-inflation-federal-reserve-transitory/
4https://www.wsj.com/articles/jerome-powells-comments-over-the-past-year-show-mounting-inflation-concerns-11643236572