Inflation and your Investments

Jillian Diana |

There has been a lot of discussion in the news recently about inflation. There has even been some speculation whether the US could face high levels of inflation like we saw in the 1970’s. Seasoned market analysts disagree on whether an increasing rate of inflation will continue or whether it will be a short-term blip.

For three decades, inflation has been largely absent from developed markets.1 For many investors these are uncharted waters, so they may have difficulty deciding how to react.

Cause and effect

If you’ve recently purchased a car, booked travel, or priced out a home improvement project, you may have noticed that prices are up. As COVID restrictions ease around the country, Americans are starting to spend money again. Unfortunately, the increase in spending is happening at a time when there are also shortages, causing price spikes in certain areas of the economy.2
Economists are concerned because of recent key inflation measures:

  • The 0.9% month-over-month increase in April’s Core Consumer Price Index (CPI) is the highest reading since 2000, and almost double the previous monthly reading of 0.54%.3
  • April’s core CPI also represents the highest month-over-month increase since 1981 and ranks as the 26th largest month-over-month jump in core CPI since 1959, placing it in the 97th percentile over that period.3
  • All months with a month-over-month increases higher than April 2021 occurred in the 1970s or 1980s.3

Higher prices erode purchasing power, not only for household goods but also for investments. When inflation rates are higher, investors realize a lower gain when they sell. For example, if an investor sold some of their portfolio at a 5% gain, if the inflation rate was 3% then they effectively only earned 2% on those investments.

The bond markets are especially impacted because of the inverse relationship between bond yields and prices. Inflation causes yields to rise, effectively eroding the capital of bonds. Rising yields mean prices will fall and future interest payments bondholders receive are also worth less.

What’s next?

The Fed has forecast the Consumer Price Index to rise to 2.6% this year. Market expectations are for US inflation to rise in the near term but come down in the longer term. What’s less clear is whether the Fed’s forecast accounts for supply shortages and upward price pressures on many areas of the US economy, including freight, semiconductors, housing, raw materials and labor.4

What can you do in the face of uncertainty?

Market conditions are always changing. It’s impossible to predict how the markets will react to heightened inflation risk or any other pressure. The average investor is usually better off sticking to their long-term investment strategy, and this is no different.

If you are worried about how inflation could impact your investments, call your financial professional. They can help you make informed decisions.


1. What Works When Inflation Hits?, Man Institute, accessed May 28, 2021,
2. Suffering from sticker shock? Here are 3 things you shouldn’t buy now while prices are high, CNBC, Jessica Dickler, accessed May 28, 2021,
3. Macro Minute, Special Inflation Edition, Federated Hermes, May 12, 2021
4. How “Sticky” Will Higher Inflation Be?, Hartford Funds, accessed May 28, 2021,

This is a general communication for informational and educational purposes. The information is not designed, or intended, to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. If you are seeking investment advice or recommendations, please contact your financial professional.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.

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