How important is inflation for investors?

TL; DR:

  • Inflation has a direct effect on consumer spending, which also affects consumer inventories.
  • Inflation is impacting the economy as a whole, but certain industries like consumer goods and supply chain, in particular, are currently being affected.
  • Understanding inflation for investors can be essential for your portfolio, and Q.ai makes it easy.

Inflation recently experienced a significant spike. To put it simply: Consumer prices have risen faster in 2021 than they have in any 12-month period since 1982 – in some four decades – according to data from the Consumer Price Index. December consumption.

Specifically, the consumer price index rose 0.5% in December and 7% for the year. Even excluding energy and food, two generally volatile sectors, these figures were still at 0.6% and 5.5%. Of course, the cause for concern is that these numbers are well above the Federal Reserve’s target inflation rate of 2%.

But ordinary consumers aren’t the only ones worried about inflation. Investors are also affected. Luckily for you, Q.ai has a Kit for that. Q.ai Inflation kit gives you a defensive bunker against dollar inflation, giving you a smart response to possible cash devaluation.

The inflation kit is designed to guard against the risk of inflation. You can think of it as sharp protection for your wallet. And, while you explore the possibility of diversifying your portfolio with this kit, you can also dig a little deeper into why exactly inflation is rising and why exactly you should care here…

Download Q.ai for iOS for more investment content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay any fees or commissions.

What is inflation for investors?

Inflation refers to a sustained trend of creeping prices of goods and services over time and the resulting reduction in the purchasing power of a given currency. But it doesn’t just affect one industry or another; rather, it has an impact on the whole economy.

Economists measure increases and decreases in inflation over time, known as the rate of inflation.

The concept of inflation is essential because it represents the value of the dollar. In other words, when inflation goes up, the value of the dollar goes down, which means the money doesn’t go as far. Some obvious industries where we are feeling the impact of inflation are the housing market, the food sector, fuel economy and consumer goods.

What has been the impact of the rise in inflation?

While many central banks aim to keep inflation around 2-4% each year, the recent jump to 7% is causing concern across the country. Right now, Americans are spend more but pay less.

The supply chain crisis would also be “fuel inflation.” For example, ocean freight carriers made about $150 billion in profits in 2021, Bloomberg reported. This number is multiplied by nine compared to the previous year. Goods and freight costs are rising due to a combination of congested ports and a shortage of container capacity.

Inflation is should continue to climb throughout the year. Procter & Gamble

PG
, for example, raises prices while costs to the business increase dramatically. After all, the company expects to pay $2.3 billion in freight costs and $300 million in freight costs after taxes, which is significantly more than before, according to CNBC.

However, despite the decline in the value of the dollar, there are certainly benefits to a rising rate of inflation. Take, for example, the current COVID-19 crisis. Inflation right now is largely the product of low interest rates set by the Federal Reserve, direct government stimulus, and long-stifled consumer demand for goods and services as the country recovers and reopens.

The combination of these factors has led to demand exceeding supply, resulting in shortages, ultimately substantial price increases. But it’s also why economists generally view inflation as neither good nor bad. Instead, they generally agree that, although it can weigh on people’s pockets, inflation is sometimes a sign of economic recovery.

What should investors do in the face of inflation?

The importance of inflation for investors is manifold. Because inflation affects the value of the dollar, it can cause the value of your overall portfolio to drop. Basically, the less valuable your dollar is, the less valuable your overall investments are.

Two key areas affected by inflation that investors should be concerned about are supply chain and consumer stocks.

On the one hand, supply chain bottlenecks are forcing companies to raise prices. Even some businesses or industries that don’t have huge shifts in demand may have to cut supply and raise prices in response to other shortages that ultimately affect them.

Consider, for example, semiconductors, including microchips, which are used in a whole range of products. They are a key element in the production of so many consumer goods, even if they represent only a fraction of this production. Consequently, the recent shortage of semiconductors has made some goods more expensive to produce, even though these industries were not directly affected by increases in demand.

All of this, of course, affects consumer spending, which in turn affects consumer inventories. Generally, stocks tend to be more volatile during periods of high inflation. While value stocks tend to perform during inflation, growth stocks, on the other hand, generally perform better during periods of low inflation. This is because value stocks have strong cash flow that slows down over time, while growth stocks have little to no cash flow, but investors expect this to change gradually.

Either way, you might end up paying too much for stocks during times of inflation, and when inflation goes down, your inflated earnings might go down as well.

To hedge against inflation, you should diversify your portfolio by investing in alternative assets across a multitude of sectors. Some investors also choose to invest their funds in financial instruments that are strategically designed to hedge against inflation, such as low-risk Treasury inflation-protected securities (TIPS) and certain mutual funds and ETFs that can help protect your wallet.

Q.ai’s inflation kit, however, will do the work for you. So you don’t have to spend time monitoring supply chain, consumer demand, or buying power, and you don’t have to do the math calculating strategic market moves in response to all of this.

Learn more about the Inflation kit and what it can do for your investments.

Download Q.ai for iOS for more investment content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay any fees or commissions.

About Mike Stevenson

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