The Consumer Price Index, which measures the average change over time of prices paid by urban consumers, had a year-over-year gain of 5.4% in September, the fastest pace in decades.
Meanwhile, the Federal Reserve’s preferred measure of inflation, the core personal consumption expenditures price index, climbed to a 30-year high in August, when it was up 3.6% over the previous year.
Officials at the Fed are taking notice, based on recently released minutes from a September meeting, where some said it could last longer than they had assumed. They’re not the only ones who are worried. More than 7 out of 10 of retirement age investors — 71% — said they believe rising inflation will negatively affect their retirement savings, according to a recent survey from Global Atlantic Financial Group.
“The big argument right now is how much inflation are we going to get and how permanent will it be,” said James Angel, associate professor of finance at Georgetown University’s McDonough School of Business. “Signs of cost push inflation, which is marked by increases in production costs, are cropping up now, just as they did in the 1970s. On top of that, there has been both monetary and fiscal stimulus heaped on the economy. That in itself is going to be inflationary. We need to buckle up our seat belts. Inflation is here. It’s real.”
Financial advisors who landed on this year’s CNBC Financial Advisor 100 list say inflation is a top issue in their work with clients. For many of those clients, it is as much emotional as it is financial.
“A lot of our clients came of age in the ’70s, the last time we saw big-time inflation take hold,” said Andy Pratt, partner and director of investment strategy at The Burney Company.
The firm, which is based in Reston, Virginia, typically focuses on clients with $1 million to $2 million in investable assets.
“Their clients remember prices skyrocketing, long gas lines and not being able to afford things,” Pratt said. “The perks of high inflation, like higher wages, are not as top of mind.”
To help address their emotions, the firm has reminded clients that this is not necessarily a repeat of the inflation they remember, and that it can happen for various reasons.
“It also has been coming up with strategic asset allocations to help them stomach inflation,” Pratt said.
While that includes some exposure to bonds, the firm is cautious about over-allocating to that asset class. At the same time, they have been leaning towards value stocks over growth stocks.
Meritage Portfolio Management, a boutique portfolio management company also has clients, particularly baby boomers, regularly ask about what the surge in inflation means.
“Stagflation, which is marked by high inflation and high unemployment, is one of the top concerns,” said Mark Eveans, president and chief investment officer at the Overland Park, Kansas-based firm.
Notably, cost push inflation, as mentioned by Angel, could be a stagflation trigger. Other experts have also warned stagflation is a key risk to watch for.
“The big risk for investors in such an environment is that it would be very difficult to achieve real growth, rather than nominal growth,” Eveans said. “The ’60s to early ’80s were a perfect example of that. That was not a good time for investors, because they lost real money during that time.”
To address that risk, Meritage has taken the position that inflation is less transitory than some experts have projected. It is also adjusting the strategies for its portfolios, which it typically builds stock by stock and bond by bond. The firm has increased its exposure to value equities versus growth equities in the past nine months, which Eveans calls an “at the margin change,” rather than a sea change.