As fall nears, the US economy continues to rebound from COVID-19. People are eager to get out, have fun, and take vacations—which is good for the economy. Unfortunately, there’s a downside: inflation. As you know, inflation is characterized by rising prices and a decrease in the purchasing power of our money. It can happen when there’s too much demand chasing a limited supply of goods and services. A little inflation can be a sign of a thriving economy, since it means consumers are spending—which fuels demand, creates jobs, and drives growth. However, if prices rise too much too quickly, people could stop spending and bring the economy to a grinding halt.
In a way, inflation is like a potent spice. A little bit can make your dish a success, but too much can give you heartburn.
So, where are we today? According to the Labor Department, prices are now rising faster than they have since 2008. As Covid-19 infection rates drop and pandemic restrictions are eased, people are ready to go out and enjoy themselves. At the same time, many companies are still recovering from supply chain disruptions caused by the pandemic. Inventories are low and many businesses are short-staffed, struggling to fill open positions. Put it all together and you have too much demand chasing too few goods and services.
So, what does this mean for the stock market? High inflation can be a negative for the market since it increases labor and material costs. It can also reduce expectations for earnings growth, which can put downward pressure on stock prices. Investors typically expect a certain amount of inflation each year and factor it into their projected returns. So, since the markets quickly stabilized after May’s market volatility, it could mean investors have already priced inflation into the market and made their peace with it. In my opinion, the inflation we’re experiencing now is transitory. I believe the current surge in prices can be attributed to the pent-up demand caused by the pandemic. Once consumers get it out of their systems, prices should stabilize. Of course, anything is possible in today’s age of economic uncertainty.
The bottom line is that once you’re retired or nearing retirement, preparing for the long-term effects of inflation need to be a priority. The good news for those who have already made the switch to investing for income is that income strategies are uniquely designed to anticipate and offset the effects of inflation over the course of your retirement.
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm. The Retirement Income Store® , LLC and Sound Income Strategies, LLC are associated entities.