The Rise of Inflation

There is no doubt that inflation is real and it’s here.  Now what is debatable is how bad will it get and for how long.  Asking different economists will result in getting a different answer to that question.

The time horizon for transitory (meaning temporary in financial jargon) or inflation being more persistent may not be an exact science.  How temporary is transitory?  That all depends on the investor.  For one, it may be a few months and for another, it could mean a year or longer.

It all truly depends on your investment time horizon.

So, like the markets, no one can predict when inflation might end.  So instead of guessing, it might be a better idea to look at the past examples we have when it comes to inflation.

The rate of inflation increased to 15% and then over 17% in the 1940s.  These were painful yet temporary examples of inflation.  Did you know that the S&P 500 averaged annual returns of 9.2% in that decade?

The 1970s would be another example with two periods of inflation spikes that averaged a rate of 7.4%. Again, the market was positive for that decade as well.

Now on the other hand, if we look at the decade that was 2000, we see a different story.  This was the worst market performer with inflation only averaging 2.5%

If you’ve read any of our previous blogs then you would know that we do what we can to help you keep a proper perceptive on investing.  We believe in making investment decisions based on the right data and your own investment plan. Not whatever fear of the day the media is trying to push.  As we can see by this information that we wouldn’t know how the markets would perform even if we knew what the inflation story would be. 

Source: MacroTrends and Franklin Templeton – 91 Years of Bulls and Bears

The monthly value of the consumer price index is converted to a monthly rate. The monthly rates are used to compound a ‘return’ for the period under consideration. This result is then annualized to produce the inflation rate for the period. S&P 500 returns annualized for the decade of 1970s The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.