Five ways inflation impacts your investments and what you should do about it — via financialpost inflation investments
It’s important to understand what you are dealing with. Let’s look at five characteristics of inflation and its impact on the investment world. A knowledgeable defender is a strong defender. Get to your battle stations.Interest rates have already started to rise in both Canada and the United States, and many more rate hikes are expected. But investors worried about inflation need to understand interest rates have a lag effect.
Thus, there are two important considerations here. One, inflation may stay high, or even move higher, after the first few interest rate hikes. It is important not to panic if this occurs. Two, investors will look forward, and there could be lots of sector rotation ahead of any actual change in inflationinvestors believe the enemy can be defeated.
This, for the uninitiated, is how inflation takes root. Consumers fear inflation, so they start spending their money fast. This incremental demand itself pushes prices higher, and we start an upward inflationary spiral: higher prices create more demand, which itself creates higher prices. The lesson here on the enemy: perhaps investors should pay just as much attention to prices at the stores they frequent, and/or what their neighbours and friends are doing, as they do to what the U.S.
Overall, stocks have averaged annual returns about eight per cent in historical times of inflation and higher interest rates . Not great compared to some years — such as 2021 — but eight per cent is hardly a disaster. Yet you would never guess at this history based on how much selling we have seen in equities markets this year.Consumers only have so much disposable income. If it costs you $50 more to fill up your gas tank, that’s $50 less you have to spend in a restaurant.
Of course, some products are less sensitive to higher prices. Products such as medicine and cellphones are typically seen as price inelastic. But plenty of industries will see demand slowly fade as they raise prices. This can result in steep margin compression and lower earnings as sales falter . The lesson for investors: be cautious of those companies selling high-margin, non-essential products.
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