Inflation is a process. The process can move slow or fast and isn’t always as easy to identify as you may think. When the price level of goods and services rise and money is losing value, the process is alive. The rising gasoline prices of the past week are making everyone notice the inflationary process. Many price levels were rising before this, especially food.
Here are some terms and ideas for investors to know regarding inflation:
Inflation premium – an extra return that compensates investors for expected inflation.
Inflation rate – the percentage change in the price level from one year to the next.
Inflationary gap – the amount by which real GDP (gross domestic product) exceeds potential GDP.
Investment advisors may utilize Senior Floating Rate securities during periods of inflation as well as Treasury Inflation Protected securities. Both are bonds and require a solid understanding of risks before investing in them. When interest rates are very low and inflation may be being underestimated, these types of securities will likely pay a fairly low yield. This will change only when the underlying rates such as LIBOR (London Interbank Offered Rate) or the Federal Funds Rate rise. If this doesn’t happen and the inflation process continues, a pretty good case can be made for investing in equities to try and hedge against the erosion of inflation on the value of your investment portfolio.
I believe that’s where we are now.
I believe that’s where we are likely to stay for a bit longer.
That’s why I believe in utilizing stocks where appropriate.
To assess the types of inflation impacting you and your portfolio (it is not the same for everyone), please schedule a time to discuss with me.
Until next week,
Susan R. Linkous
“Susan On Money”
Note: Definitions of terms taken from: CFA Institute. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Stock investing involves risk including loss of principal.