A few people may be wondering about inflation. “Should I be worried?” “Is it time to act?” However, for the majority of investors, it doesn’t seem to be a concern. While inflation has not been headline news in several years, we believe it’s always wise to be prepared with your investments and for your future. Complacency is never a good strategy when it comes to inflation.
Inflation, Not a Repeat of History
Realistically, no one is predicting a return to the high rates of the 1970s and early 1980s. Back then, inflation nearly tripled to more than 12 percent in just two years by between 1972 and 1974! It reached another all-time high of more than 14 percent in 1980. Rising oil prices fueled both spikes.*
Today, inflation is hovering just over two percent,* and evolving forces may signal some increase. We could, however, experience a different kind of inflation, due to converging global economic trends.
Despite the Federal Reserve’s plan to return interest rate levels to normal, the U.S. monetary policy is still in stimulus mode. Tightening interest rates, which has historically been used to contain inflation, looks to be gradual. And if President Trump’s agenda—deregulation of businesses, tax changes and infrastructure plans—get pushed through, we could find ourselves in a pro-inflation environment. These factors and others signal that it might be a good time to prepare your portfolio for inflation what-ifs. Let’s examine why.
Inflation Affects Purchasing Ability, Returns
It’s been a long time since investors have had to consider the effects of inflation, but it’s good to refresh our memories. Even with rates barely creeping up, you should know that even a small amount of inflation can affect your investments and future spending power. That means your money won’t be worth what it is today, and you will pay more for the same things you purchase in the future. That has important implications for long-term goals, such as retirement. Review the example below to see how inflation has impacted the price of a pound of apples over ten-year increments.
You’re Paying More for the Same Thing
Inflation also affects the value of your investments. The hypothetical example below shows the more inflation rises, the less your investment dollars will be worth in the future.
This hypothetical example assumes an initial amount of $100,000 with no additional contributions and no return on investment. It is intended for illustrative purposes only and is not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities.
As you can see, a three percent inflation rate can reduce your purchasing power by just over 25 percent and a six percent rate could almost cut it in half. Also, consider these factors:
- Inflation has averaged 4.2 percent annually since 1964*
- Predicting inflation is difficult
- History shows that unexpected inflation spikes are not unusual
These are all good reasons to consider incorporating some sort of inflation protection into your portfolio—before it becomes an issue.
Stay Ahead of Inflation
One of the best ways to combat inflation is to prepare your portfolio beforehand. There are several ways you can position your portfolio by adding inflation-hedging assets. Our Investment Consultants can help you figure out a plan that incorporates inflation protection with our free guidance services.
Call an Investment Consultant today at 1-800-345-2021.
Check in on inflation and other economic components with our quarterly Investment Outlook.
*U.S. Department of Labor, Bureau of Labor Statistics, June 2017
The opinions expressed are those of Rich Taylor and are no guarantee of the future performance of any American Century Investments fund. This information is for educational purposes only and is not intended as investment advice.