What Is The Importance Of Inflation For Investors?

TL;DR:

• Inflation has a direct effect on consumer spending, which also affects consumer stocks.
• Inflation impacts the economy at large, but certain industries like consumer goods and the supply chain, in particular, are taking hits right now.
• Understanding inflation for investors could be critical to your portfolio, and Q.ai makes it simple.

Inflation has recently seen a serious spike. To put it simply: Consumer prices surged faster in 2021 than they had in any 12-month period of time since 1982—in some four decades—according to the Consumer Price Index data from December.

Specifically, the Consumer Price Index rose 0.5 percent in December and seven percent for the year. Even barring energy and food—two typically volatile sectors—those numbers still sat at 0.6 percent and 5.5 percent. Of course, the cause for concern is that these numbers are far above the two percent inflation rate for which the Federal Reserve aims.

But everyday consumers aren’t the only ones worrying about inflation. Investors are impacted by it, too. Fortunately for you, Q.ai has a Kit for that. Q.ai’s Inflation Kit gives you a defensive bunker against the inflating dollar, providing you with a smart response to the possible devaluation of cash.

The Inflation Kit is designed to hedge against inflation risks. You can consider it a bit of pointed protection for your portfolio. And, while you explore the opportunity to diversify your portfolio with this Kit, you can also dive into some more depth on why exactly inflation is rising—and why exactly you should care here…

Download Q.ai for iOS for more investing content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay fees or commissions.

What is inflation for investors?

Inflation refers to a sustained trend of the creeping prices of goods and services over time—and the resulting reduction of the purchasing power of a given currency. But it doesn’t just affect one industry or another; rather, it impacts the entire economy.

Economists measure the upticks and downticks of inflation over time, which is known as the inflation rate.

The concept of inflation is critical because it represents the value of the dollar. In other words, when inflation rises, the value of the dollar drops, which means money doesn’t go as far. Some obvious industries in which we feel the impact of inflation are the housing market, the food sector, fuel economy, and among consumer goods.

What has been the impact of rising inflation?

While many central banks aim to keep inflation around two to four percent each year, the recent jump to seven percent is causing concern across the country. Right now, Americans are spending more, but affording less.

The supply chain crisis is also said to be “stoking inflation.” For instance, ocean-freight carriers raked in an estimated $150 billion in profits in 2021, Bloomberg reported. This number is up nine-fold from the year prior. Commodity and freight costs are climbing due to the combination of congested ports and a shortage of container capacity. 

Inflation is expected to continue climbing throughout the year. Procter & Gamble
PG
, for example, is raising prices as costs for the company are significantly soaring. After all, the company anticipates paying $2.3 billion in commodity costs and $300 million for increased freight costs after taxes, which is substantially more than it’s paid before, according to CNBC.

However, despite the decrease in the dollar’s value, there are certainly some benefits to a climbing inflation rate. Take, for example, the current COVID-19 crisis. At the moment, inflation is largely the product of low interest rates set by the Federal Reserve, direct government stimuluses, and long-stifled consumer demand for goods and services as the country recovers and reopens.

The combination of these factors has led to greater demand than supply, which translates to shortages, ultimately, substantial price jumps. But this is also why economists generally consider inflation to be neither good nor bad. Instead, they generally agree that, while it can take a toll on people’s pockets, inflation is sometimes a sign of economic recovery.

What should investors do about inflation?

The importance of inflation for investors is manifold. Because inflation affects the value of the dollar, it can cause the value of your overall portfolio to plummet. Basically, the less value your dollar has, the less value your overall investments have.

Two key areas affected by inflation that investors should care about are the supply chain and consumer stocks. 

For one, supply chain bottlenecks force companies to increase prices. Even some companies or industries that don’t have huge changes in demand may have to reduce supply and raise prices in response to other shortages that ultimately affect them.

Consider, for example, semiconductors, including microchips, which are used in a whole gamut of goods. They’re a key component in the production of so many consumer goods, even though they only account for a fraction of that production. Therefore, the recent semiconductor shortage made certain goods more expensive to produce, even if those industries weren’t directly affected by demand increases.

All of this, of course, affects consumer spending, which, in turn, affects consumer stocks. Typically, stocks tend to be more volatile during high inflationary periods. While value stocks do tend to perform during inflation, growth stocks, on the other hand, generally see better returns during periods of low inflation. This is because value stocks have strong cash flow that slows over time, while growth stocks have little to no cash flow but investors expect that to gradually change.

Regardless, you could end up overpaying for stocks during periods of inflation and, when inflation declines, so could your inflated earnings. 

To hedge against inflation, you should diversify your portfolio by investing in alternative assets across a multitude of industries. Some investors also choose to invest their funds in financial instruments that are strategically designed to hedge against inflation, like low-risk Treasury Inflation-Protected Securities (TIPS) and certain mutual funds and ETFs that can help to protect your portfolio.

Q.ai’s Inflation Kit, however, will do the legwork for you. So you don’t have to spend any time keeping tabs on the supply chain, consumer demand or purchasing power, and you don’t have to do any number-crunching by calculating strategic market moves in response to it all.

Learn more about the Inflation Kit and what it can do for your investments.

Download Q.ai for iOS for more investing content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay fees or commissions.