Note from the CIO: The Return of Inflation

Please note the publish date of this blog. Financial information, market conditions, and other data mentioned in this post may no longer be accurate or relevant.

At Abacus we are goal-focused, values-aligned, planning-driven, long-term investors. So, it might come as a surprise the Abacus Investment Committee strives to stay on top of market trends and cycles. We do this not as a timing tool, but to question our assumptions and stress test our understanding of what moves markets. We also do this so our clients will hopefully never feel like they need to follow market trends – that is what we are here for. Accordingly, inflation is one of the market trends shaping 2021 and has direct relevance to our clients and their portfolios. 

Briefly, inflation is a rise in the overall price of goods and services (think of your groceries, or gasoline, or electric bill) coupled with a decrease in the purchasing power of the underlying currency. Inflation can arise from higher demand for those goods and services – which drives up prices – or it can also result from an increase in the amount of money in circulation. We’ve all heard the quip “the Fed prints money”, meaning the more dollar bills there are in the economy, the less “special” each dollar is (and the more of them it takes to buy your groceries).

We have been keenly watching the uptick in inflation that started last year. The United States has embarked on a historic economic experiment. Including the new American Rescue Plan ($1.9 trillion), the government has committed over $5 trillion in fiscal support since the pandemic began – or roughly 25% of the entire pre-pandemic economy. Before the ARP, the overall economy was expanding and Americans held upwards of $2 trillion in “excess savings,” a reservoir of untapped consumer buying power rarely seen since the end of WWII. This obviously pales in importance to the tens of millions of Americans who have suffered the devastating loss of livelihoods and loved ones. And yet, it remains our fiduciary duty to steadily continue to look ahead. As the pandemic has retreated, vaccinations proliferated, and herd immunity approached in much of the country, the uptick in economic activity and massive government support has made trillions of dollars available to the economy.

For context, inflation – or the percentage rate at which prices change – has averaged 2.9% per year going back to 1926 (the earliest data we have on the Consumer Price Index (CPI)). I prefer to anchor to 1970, not because it was my birth year, but because the economy officially ended its reliance on the gold standard that year. Since then, inflation has averaged 3.9% per year. Inflation over the past decade, from 2010 to 2019, averaged 1.8% per year. 

In the first half of 2021, inflation is up 4.3% (or 8.8% in annual terms with compounding). For the 12 months ending in June of 2021, inflation was 5.4%  – the largest 12-month reduction in our purchasing power since 2008. It is effectively a flat tax on everyone equally, no matter how much money or income you have. And it tends to hurt poorer communities the most because they do not have access to strategies for mitigating inflation (although Abacus is actively working on ways to deliver financial advice and education to these communities).

Most of us have clear spending goals and it’s unsettling that something we thought was affordable could unexpectedly become out of reach. However, financial planners draw an important distinction between money and purchasing power – and it’s our purchasing power we should care about more.

We don’t know for sure if there will be an acceleration of inflation in the future. The market is only pricing in an expectation of 2.5% annual inflation for the next five years, but last summer its five-year annual expectation was 0.5%. This could mean the market is likely already pricing in significantly higher inflation. Regardless of uncertainty, here’s what we do know for our clients: 

  1. We know what your goals and values are. 
  2. We know what the plan is for getting to those goals and aligning to those values, using an evidence-based approach. 
  3. We know your portfolio is very well-suited to that plan and is well positioned to cope with inflation, which we proactively take into consideration with every financial plan.

Part of that proactivity involves the power of diverse investments. A question I’m asked about often is buying gold and other precious metals to hedge against inflation. I decided to compare gold to stocks as an inflation hedge over various start dates through May of this year and this is what I found:[1]


It turns out gold is a halfway decent inflation hedge. But why stop halfway? Clearly stocks have been the superior inflation hedge, allowing investor purchasing power to expand significantly over time even in the face of inflation. Additionally, companies have the ability to raise their prices and stay profitable in inflationary environments. And many companies hold physical assets like manufacturing equipment which also increases in value under inflation.

Our portfolios also hold real estate investments, which provide inflation protection in multiple ways: the ability to raise rents when leases are up; and similar to many companies, letting their primary assets – real property – rise in value under inflation.

Finally, we also invest a portion of our bond allocation specifically in inflation protected bonds, which pay less yield than normal bonds, but fluctuate in principal value each month based on changes in inflation.

You can be sure the Abacus Investment Committee will continue to monitor inflation and other market trends, as well as research the best investment tools and strategies. Our time-honored approach not only gives you the greatest chance of reaching your unique financial goals, but it lets you do it without having to become an inflation specialist yourself.


[1] Gold data from “Gold Prices – 100 Year Historical Chart” on Macrotrends. S&P and inflation data from Dimensional Fund Advisors.


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