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Investing In An Inflationary World

It is too soon to view the recent selloff in stocks as anything more than an overdue correction. We do not believe that this is the start of a meaningful bear market and are recommending our clients “stay the course.” Investors are spooked by the recent inflation numbers and concerned about the impact of Fed tightening. Although, it should be to no one’s surprise that inflation is running high, nor that the Fed would eventually respond by raising interest rates.

In 2020, Fed Chairman Powell publicly announced his intention to allow inflation to exceed its 2% target “for a while” to make up for the period it fell short. Perhaps we were not prepared for the extent of his commitment even when he dropped rates to zero and doubled the Fed’s balance sheet by almost $5 trillion dollars. But perhaps Chairman Powell was not prepared for the additional inflationary impact caused by fiscal policy when trillions of dollars in government “free money” transferred into personal bank accounts across the United States. Or perhaps he did not count on supply-chain issues flaring up globally causing prices to increase even further due to shortages in workers, shippers, and product parts.

Whatever the reasons, inflation will likely stick around for a while, perhaps even longer than Covid-19 will. Some inflation will be “transitory” like the supply shortages that should work themselves helping lower the costs of many goods and services. However, the substantial increase in the amount of dollars that are circulating in the economy and held in our bank accounts is a very different issue. M1 is the measure of the money supply, and its chart tells a very inflationary story. A 60-year chart, that looks more like a Tesla stock chart, should help clarify why inflation is "sticky." Since 2020 M1 has seen a fivefold increase, meaning there is five times as much liquid cash floating around and available in our bank accounts since only two years ago. I’m no Economist, but this tells me that inflation-adjusted investment strategies should be top of mind for all of us.

So, how does one go about keeping up with inflation? To state the obvious, becoming fearful and going to cash is not the answer. Nor will investing in bonds that are issued at a fixed rate be an ideal way to allocate capital. Those are both sure-fire ways to lose purchasing power. No, the way to beat inflation is to own assets such as stocks, commodities, metals, real estate, or inflation-sensitive bonds like I-bonds (see my former write up on I-bonds). You will want to invest in companies that have pricing power or the ability to raise their prices for their goods or services along with inflation. You will want to hold debt that pays you a variable rate instead of a fixed rate (opposite if you are the borrower). And you should own (not rent) property that has the ability to increase in value alongside the inflation rate.

Is it just a coincidence that the consumer price index and the latest GDP economic growth figures both came out around 7%? I’m not certain, but I do know that people are wealthier and salaries are higher than ever before in US history, and there is currently 5x more money chasing a limited number of goods, and services. So, the best way to stay ahead of inflation is to make sure you are an owner of the assets, goods and services that are in demand. Unfortunately, volatility is the price of admission to ownership, and as an investor, one must not shy away from it. If you are still saving for retirement, keep buying more inflation-friendly assets on pullbacks. If you are retired, make sure your investment income has the potential to increase with the cost of living in the form of higher dividend payments. Rest assured that inflation will eventually normalize, but for now, you may want to prepare yourself for a $10 cup of Starbucks coffee in the not-so-distant future. Maybe a reason to buy some shares of Starbucks stock (SBUX).


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