Should you be worried about rising prices? Maybe concerns about inflation are overblown? How can you position yourself for financial success regardless of how much prices rise?
What Is Inflation?
In economics, inflation refers to a general increase in prices of goods and services. Rising inflation can be costly for consumers, stocks and the economy. Investors, banks and businesses continuously monitor and worry about the level of inflation.
For consumers, inflation means higher prices on goods and services, and the risk of a loss of purchasing power if their income fails to keep up. The opposite, a decline in prices, is known as deflation.
Who Does Inflation Hurt?
Inflation can make debts easier to pay off and can give workers room to negotiate for higher wages. But it can also erode purchasing power, deplete savings and, if it is severe enough, destabilize entire economies.
Investors try to anticipate the factors that impact portfolio performance and make decisions based on their expectations. Inflation is one of the factors that may affect a portfolio. Value stocks perform better in high inflation periods and growth stocks perform better when inflation is low. Stocks tend to be more volatile when inflation is elevated.
Managing Your Capital Wisely
Several asset classes perform well in inflationary environments. Tangible assets, like real estate, oil and other commodities, have historically been seen as inflation hedges.
Many investors have never experienced inflation like in the past few months, so it may be a good time to revisit your portfolio and confirm whether you still feel confident.