Inflation and its Impact on Investors

Understanding Inflation

First, let’s start by defining what exactly inflation is. Inflation refers to the general increase in prices of goods and services in an economy over time, leading to a decrease in the purchasing power of money. This means that the same amount of money buys fewer goods and services as time goes on. Inflation can be caused by various factors, such as increased demand, rising production costs, changes in exchange rates, and expansionary monetary policies pursued by central banks.

In today’s inflationary environment things are changing rapidly. We’ve just experienced the fastest stretch of interest rate hikes in US history – rates have risen nearly five percentage points in just 14 months.

While no previous period of inflation perfectly mirrors current events, seeking historical parallels becomes valuable when focusing on inflationary periods with supply chain disruptions and surges in consumer demand following temporary suppression. The inflationary era after World War II appears to be the most relevant comparison for the present economic situation, and indicates that inflation might subside rapidly once supply chains are fully operational, and pent-up demand stabilizes.

In today’s marketplace, navigating the complexities of investing and the overall economy demands a keen understanding of its main contributors. By adeptly identifying the key factors driving this inflationary climate, you can strategically position yourself for success.

How We Got Here

• As economies recovered and reopened after lockdown, pent-up consumer demand skyrocketed, fueling price increases. To support economic recovery, central banks implemented accommodative monetary policies – designed to maintain low interest rates, inject more cash into the economy, and reduce unemployment – which further amplified inflationary pressures.
• Unprecedented disruption in supply chains, stemming from the global pandemic that hit economies hard in preceding years. Supply chain bottleneck and logistics challenges have led to reduced production capacities and increased costs for businesses, ultimately leading to higher prices for goods and services. One of the most notable examples is the global chip crisis, affecting the automotive industry at large and causing additional strain on an already stretched industry. Businesses are now focusing on redirecting supply chains and driving manufacturing back to the US from overseas. As this continues, we can expect to continue to see a longer term trend of reshoring and diversifying supplier options across different regions.
• A huge labor shortage, resulting from a post-covid environment when a lot of skilled workers left the workforce, including Baby Boomers transitioning into retirement. With not enough Gen X’ers to replace leadership positions, businesses are struggling to find the workers they need and retain the workers they already have. As businesses continue to increase wages to keep up with the competition, they’re having to pass along higher labor costs to their customers. But as prices increase, wages are failing to keep up with inflation, creating a wage-price spiral that may only strengthen inflationary pressures.
• An energy crisis due to a surge in demand for oil, beyond what suppliers are able to produce. The lack of reinvestment into new production domestically, which has dropped by over 50% over the last seven years, has been a catalyst for inflation. Despite ESG narratives that are disincentivizing investments into fossil fuel production, demand is still increasing and is projected to remain high.

Questions That Will Drive Your Current Investment Decisions

How can I maintain purchasing power?

Invest in real assets and private companies. Holding onto cash or treasuries may boast attractive yields, but after accounting for inflation, you’re not gaining much purchasing power. Allocating towards real assets holds the potential for substantially higher returns, making it a more attractive option for investors seeking to beat inflation and achieve greater wealth accumulation in the long run.

Should I wait to invest?

Don’t try and time the market perfectly. Have confidence in where you’re investing and be patient. Given current supply and demand fundamentals, we believe it is an opportune time to invest in flex/industrial commercial real estate properties. There is an ever growing demand for space due to the growth of the service economy and the reshoring of certain industries, and there is a finite level of supply due to the high level of construction costs. If you believe in the long-term demand for certain real estate asset classes, now is an excellent time to invest.

As we continue this series, we will delve into the concepts of deflation and stagflation, and provide guidance on how to capitalize on the tides of change and volatility, transforming them into advantageous investment avenues.