Welcome to Inflation Nation

Welcome to Inflation Nation

January 14, 2022

The media caterwauling was loud indeed following the week’s consumer price index (CPI) reveal. Prices paid by consumers increased 7.0% year-over-year in December—the highest 12-month inflation rate since June 1982. Strip out food and energy prices, which tend to be more volatile, and costs to consumers rose 5.5%—the most in 30 years.

Any way you look at it, we are contending with the highest level of inflation in a generation. So, that’s what we’ll focus on this week.

Our current takeaway is that inflation appears to be peaking. But if higher prices have you concerned about your financial plan or investment portfolio, please don’t hesitate to give us a call. We’d be happy to have that conversation and help you make any necessary adjustments.

stock market returns

Main Street vs. Wall Street

Main Street and Wall Street seem disconnected when it comes to inflation. The average household is seeing prices rising at a rapid rate. According to the December Survey of Consumer Expectations, the median respondent believes inflation will be at 6% this time next year. Meanwhile, the mammoth Treasury bond market and its traders and investors believe inflation will run around 2.8% over the next five years and 2.5% over the next decade (as measured by the Federal Reserve Bank of St. Louis’ breakeven inflation rate indicators). That’s a gaping disparity.

The Fed’s Inflation Calculation

So, are higher prices going to stick around and will we see 6% one year from now, as consumers fear? Not if the Federal Reserve has anything to do with it.

At his Senate confirmation hearing this week, newly reappointed Chair Jerome Powell called inflation a “severe threat” to the stability of economic recovery and gave no reason to doubt that the central bank would act fast. Even without the telegraphing, with inflation running at 7% and the unemployment rate below 4%, it’s no surprise that the Fed is lining up a series of inflation-fighting maneuvers.

We’ve known for months that the Fed would likely taper its stimulative bond-buying more rapidly than anticipated. And it is all but certain to begin raising the fed funds rate following its scheduled meeting in mid-March, then to continue hiking rates over the course of the year. The central bank is also apt to begin to let maturing bonds “run off” of its balance sheet rather than replace them with newer bonds. As Powell told senators on Tuesday, “We’re going to have to be both humble and a bit nimble.”

A more active Fed isn’t cause for concern—rather, it’s a sign of an economy that’s able to stand on its own two feet again. And remember, taking stimulus away means those levers are available to Powell & Co. if the recovery veers off its growth course and a resumption is required.

As the Fed prepares to act, there are signs that the supply chain seize-up is loosening.

Chart of the Week: Supply Chain Pressure Eases…Slightly

We monitor a wide range of data to form our outlook on the market and the broader economy—every other week, we’ll spotlight one indicator our analysts have found informative.

Supply chain
Note: Chart shows monthly deviation from normal index level from December 1997 through December 2021 for the Global Supply Chain Pressure Index. Source: Federal Reserve Bank of New York.

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso

If you really squint, you can see it: According to a new index constructed by the Federal Reserve Bank of New York, global supply chains started easing in November. The trend continued in December despite the omicron wave of COVID-19. You can find other signs of easing supply chain and inflationary pressures in the ISM manufacturing report from last week as well as in falling producer prices in China. Supply chains won’t stay as kinked as they’ve been; it just takes time for suppliers to come back online to meet demand.

Has Inflation Peaked?

We think so.

Yes, prices increased at the fastest pace in a generation last year, but the economy was going through a once-in-a-generation disruption. While supply chains were twisted completely out of shape, consumer demand remained strong thanks to government support (both from Congress and the Fed). It’s taken time, but as shown above, those pressures are beginning to ease—and should continue to do so in the year ahead.

The unknown factor in the inflation equation is whether higher prices are built into our mindset and impacting consumer behavior. If you expect prices to move higher, you might go out and buy more now at today’s “bargain” rates or ask for a raise at work. Those actions lead to price hikes (increased demand fueling higher prices at stores or businesses charging more because they are paying employees more), which then starts the cycle all over again.

We can’t say for sure whether that feedback loop is running, but, again, the factors we can measure point to easing inflation. Federal Reserve jawboning may also help allay consumer anxiety. We’ll continue to keep a close watch.

In the meantime, yields are rising. That means bond prices are falling; it also means that as you reinvest your bond income, you’re buying higher yields and more shares of your bond funds at lower prices. The benefits may not show up tomorrow, but they’ll be there down the road.

For those who are spending the income generated by their bond holdings or are worried about seeing a principal decline, here’s a little perspective: Investors in Vanguard’s Total Bond Market Index fund who weren’t reinvesting saw their shares decline 3.7% in 2021. That “bad” year in the bond market is equivalent to a bad day in the stock market. With the stock market’s recent volatility, we still see that bonds are filling the shock-absorbing role they always have. Once again, diversification pays off for disciplined investors.

Ask Us a Question!

We’re always interested in the topics or themes you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Financial Planning Friday
Natural Disasters: Preparation and Recovery

As financial planners, we spend a lot of time thinking about worst-case scenarios—even ones that are impossible to predict, like natural disasters. Today, we look at preemptive measures and ways to shore up support to minimize your headaches during recovery.

  1. Keep on top of your coverage. If you haven’t updated your homeowner’s policy since completing a major renovation, it’s time to call your broker to make sure your cost of rebuilding is covered in today’s dollars. Your policy may have been suitable when you first moved in, but the rising costs of materials and labor may mean your payout level is insufficient today.
  2. Start the claim process right away. Always file an initial claim with your insurance company as soon as you can after a disaster, even if the claim is incomplete—you want to secure your place in the queue, especially if the event impacted many of your neighbors. Report big-ticket items first to open the claim and add to your file as you continue to document lost items. Depending on the language in your policy, filing fast may qualify you for an immediate payout to help with living expenses.
  3. Navigate mortgage snags and property-assessment issues. Depending on the severity of the damage or loss, talk to your lender about a temporary break on your mortgage—they may work with you to waive payments for a limited time. The insurance proceeds should help pay off your mortgage if you decide not to rebuild. And check with your town to see if your property taxes will decrease, assuming you believe the damages may lower the resale value of your home.
  4. Get ahead of tax considerations. The IRS may extend certain tax deadlines for affected taxpayers if the losses are grave enough. And in some cases, you can take a casualty deduction: Individuals and businesses that suffer uninsured or unreimbursed disaster-related losses can claim them on their tax return. Net casualty loss doesn’t need to exceed 10% of adjusted gross income and taxpayers needn’t itemize in order to qualify.
  5. Revamp your financial plan. If you find that you are underinsured in the wake of a disaster, we can help you by reviewing your financial plan to examine the effects and suggest next steps. We would also be happy to discuss your homeowner’s insurance policy to make sure it meets your needs.

Every natural disaster presents unique challenges. If you’d like to discuss how to best situate yourself in advance, don’t hesitate to give us a call. And if you’re impacted by such an event, call us as soon as possible. We’re here for you.

Are there any topics you’d like us to address in a future FPF section? Please contact your team or write to us at info@adviserinvestments.com. We’d love to hear your suggestions.

Podcast: Wiener and Lowell—2022 Trends We’re Watching 

As 2022 begins, we’re seeing many of the same headline risks that dominated 2021—including another rising wave of COVID-19 infections impacting the economy. But as Chairman Dan Wiener and Chief Investment Officer Jim Lowell explain in this episode of The Adviser You Can Talk To Podcast, this year looks to be very different than the last. Dan and Jim discuss the key trends and indicators we’re watching, including:

  • The Fed’s three weapons against inflation
  • Whether wild swings in sentiment will rock markets again this year
  • Why there are still bargains to be found in stocks despite the headlines

Dan and Jim give their thoughts on why we still believe in bonds and lay out our overall approach to diversification in what we think is likely to be an even more volatile 2022. Click here to listen now!

Adviser Investments in the Media

Chief Investment Officer Jim Lowell appeared on Fox Business this week to explain why traders may be looking beyond omicron and inflation.

Director of Research Jeff DeMaso commented on the launch of Vanguard’s latest target date fund in RIABiz.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade revealed what’s behind the sell-off in growth stocks, while Vice President Steve Johnson looked at whether they would regain their lost luster.

Looking Ahead

Adviser Investments’ offices and the markets will be closed Monday in observance of Martin Luther King Jr. Day. We’ll be back at our desks and ready to serve you bright and early Tuesday morning. Next week, we’ll be reviewing fourth-quarter earnings reports in addition to reads on manufacturing, homebuilding, housing starts, existing home sales and leading economic indicators.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


Please note: This update was prepared on Friday, January 14, 2022, prior to the market’s close.

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