The rate of inflation in an economy—increases in the prices for goods and services—is of particular importance to investors because it erodes portfolio purchasing power and historically has affected the returns to stocks and bonds.
• Though rapid money supply growth and huge fiscal deficits represent potential inflationary pressures on the horizon, there remains little inflation in the near-term outlook due to a weak U.S. economy, deleveraging, and banks’ unwillingness to increase lending.
• The timing and magnitude of future inflationary pressures will depend on the Federal Reserve’s exit strategy and other uncertain factors, but there is greater risk that inflation rates rise from low current levels in the coming years.
• High unemployment makes the risks of a near-term return to a 1970s-style, wage-push inflationary outbreak unlikely, with a commodities induced,early-2008 scenario more plausible.
• Investors may hedge against potentially higher inflation by allocating capital to asset categories that historically have held up better during times of high or accelerating inflation.
The link to the PDF article from Market Analysis, Research & Education (MARE) by Dirk Hofschire, CFA, at the bottom of this post provides answers to the following questions about inflation that serious investors should be contemplating in the current environment:
- 1. Is inflation accelerating?
- 2. Why is higher inflation expected?
- 3. Why hasn’t inflation occurred yet?
- 4. When will inflation return?
- 5. How high will inflation go?
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