"Predicting next month’s inflation may not be very hard because this month’s inflation can be a pretty good predictor of next month’s inflation, or next quarter’s inflation, or even the next six months’ inflation. Persistence is a characteristic of inflation. We haven’t been in a period of high inflation, or even moderate inflation, for at least 10 years, so I’m not particularly concerned that inflation will be high soon." - Eugene Fama, Nobel Laureate, Dimensional Fund Advisors Director
As summer winds down, inflation has become a common topic of concern the last few months. Sparked by increased government spending and price increases witnessed first-hand by consumers. In fact, consumer prices are up 5.4% from June 20-June 21, the largest annual increase since August 2008.
We recently analyzed data going back to 1927 to better understand the impact of inflation on investing and our portfolios. We concluded the following:
- We define high inflation during this period (1927-2020) as exceeding 5.5% per year
- High inflation reduces the impact of your investment return and purchasing power
- The impact of rising prices can be mitigated by owning high growth assets (i.e. stocks) and Inflation Protected Securities (i.e. TIPS)
We conducted an analysis of our portfolios to ensure they were well-positioned to handle potential increases in inflation. We continue to hold equity positions with growth potential and fixed income positions designed to provide a hedge against inflation. Finally, we believe the combined best guess of investors as aggregated by current market prices is hard to beat as a guide to what the future may hold. Investors are therefore better off tuning out the “noise” of pundits as a reliable way to predict inflation.
The research paper which accompanies our analysis can be downloaded below. This study was released in July from Dimensional Fund Advisors. Dimensional is a mutual fund company founded in 1981 by academics, not Wall Street sales managers. We frequently look to their research for guidance in an effort to better understand how events impact markets.
We continue to monitor the impact of inflation on our investment approach and more importantly, the long-term financial stability of our clients.