Inflation Returns After Long Hiatus Higher prices cause advnaced planning strategies Americans who should be enjoying a resurgent economy and low unemployment instead face worries over how they can cope with a new threat: the highest inflation rate in 40 years. Inflation has drawn little attention in recent years as rates remained low. However, the Consumer Price Index increased by 7% during 2021, the highest 12-month increase since June 1982, according to the U.S. Bureau of Labor Statistics. Over the previous decade, the rate had fluctuated between 1.5% and 3.2%. Over the past 18 months, the Federal Reserve Board has focused on spurring economic growth as the country recovered from the COVID-19 pandemic. When inflation began to climb in mid-2021, the Fed expressed optimism the increases were a “transitory” trend primarily caused by pandemic supply chain delays and higher consumer demand. However, by the end of the year, the Federal Reserve shifted from recovery measures (such as buying bonds and slashing interest rates to almost zero) to aggressive inflation-fighting strategies. The Fed has signaled that by March, its board will approve the first of several incremental increases in the federal funds rate over coming years (which will also drive up short-term borrowing costs). 38 / ADVISORS MAGAZINE
MAR 2022
The funds rate has stood at .25% since March 2020 and the prime interest rate at 3.25%. The Fed currently projects it will increase the funds rate to 2.1% by the end of 2024, which means a prime rate of just over 5%. While most economists expect the U.S. inflation rate will decline to 3% by the end of 2022, Americans experiencing higher prices at grocery stores and gas stations remain concerned about the return of significant inflation following years of moderate rates – and about how to plan for the financial impact of potentially continued increases ahead. “Inflation is real, and sound financial planning will always factor inflation into the overall strategy,” Rick Kent CFP®, ChFC, AIF®, CEO and founder of Alpharetta, Georgia-based Merit Financial Advisors, told Advisors Magazine. “Recognizing the true impact of inflation is quite eye-opening. Therefore, it is imperative that inflation be factored into one’s forward-looking financial strategy. Failing to do so would certainly be detrimental to the overall effectiveness of the plan.”
Higher inflation could be with us for a long time, according to Karen L. Asbra, CFP®, principal and chief operating Officer at Rappaport Reiches Capital Management, LLC, in Skokie, Illinois. However, attempting to forecast future inflation and interest rates is challenging. Rather than making short-term changes based on predictions, Asbra said, a better approach is preparing for a variety of outcomes (including increased inflation risk) as part of a long-term financial strategy. “Protecting client portfolios starts with fundamental planning,” she continued. “How much risk are they comfortable taking? What mix of cash, stocks, and bonds makes sense for their situation? Remember: stocks, as a growth asset, remain a terrific hedge against inflation, as companies generally can pass on increased costs to maintain their margins. Bond portfolios that are high quality and conservative in terms of maturities, including an allocation to Treasury Inflation-Protected Securities, make sense as well.” Make a Plan, Stick to It Kent said his first concern is for individuals who may be waiting to see how the financial picture plays out before they take action, as well as those who delay implementing a strategic financial plan for many other reasons. “With the likelihood of rising
