Over the past few months, investors have shifted their focus away from Covid-19 to risks surrounding inflation. A successful vaccine rollout coupled with pent up demand and supply chain issues have caused prices in certain areas of the economy to rise rather dramatically in a short period of time. Considering the rapid recovery in the economy, it is no surprise that year-over-year inflation figures for April and May were higher than expected at 4.2% and 5%, respectively.
While it is important to monitor the short- and medium-term implications of inflation, it is also important to remember the longer-term trends that are likely to keep inflation in check. Disinflation is a term to describe a period where prices of goods and services decrease but remain positive. Disinflation differs from deflation as deflation is the decrease of prices for goods and services and typically occurs during an economic slowdown as demand decreases.
Despite the inflationary period at this moment in time, it is important to remember the powerful disinflationary forces at work. Popular disinflationary forces would include technology, globalization, demographics, and income inequality. Each example has specific reasons as to why it would be deemed disinflationary. For example, technology can reduce costs for companies by improving efficiency, which can reduce the final cost of a good or service purchased by a consumer.
While the list is certainly not exhaustive, it does provide a strong argument as to why this inflationary period may be transitory, or temporary. Nobody knows for certain how long this inflationary period will last, nor how markets will react in the short-term to higher-than-expected inflation. Because of this uncertainty, it is important for investors to maintain exposure to asset classes such as equities and commodities as they can provide an opportunity to outpace inflation over time. Exposure to these types of asset classes can be even more important for retirees, as cost of living adjustments for social security and pension plans may not keep up with the real inflation seen within the economy. As always, this period of uncertainty calls for a diversified portfolio of asset classes whose performance does not hinge on any one economic outcome.
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.