Inflation is back

Dressel2Ryan Dressel, Investment Analyst

For the better part of the past five years, inflation growth rates in developed economies have barely budged, hovering below 1.5%. Coming out of the global financial crisis, global gross domestic product (GDP) growth was stuck below its long term average of 3% from 2011 to 2015. This extended period of low growth kept inflationary factors at depressed levels. In particular, tightened credit markets and low confidence in the broad economy had the most adverse effects on inflation. These factors limited both businesses and consumers from spending more, driving prices higher. Furthermore, the end of a decade-long commodity cycle kept input costs at extremely low levels.

Source: The World Bank

Source: The World Bank

Recently however, economic signs of life indicate that inflation is on the verge of returning to normal levels. The price of oil has rebounded off of its lowest point since 2008. The housing market is healthy. Purchases of consumer durable goods such as automobiles surged 11% over the past year. And, according to FactSet Research Systems, wages have begun to rise as the labor force has regained traction after massive displacements caused by the global financial crisis. These economic data points have led the U.S. Consumer Price Index (CPI) to rise 2.1% in the 12 months through December 2016, the largest increase since June 2014. Additionally, inflation accelerated for the fifth consecutive month.

Source: FactSet Research Systems

Source: FactSet Research Systems

Additional factors have also raised inflation expectations in 2017 and beyond. Fed Chair Janet Yellen has long-held a position of allowing inflation to run past its 2% target in order to reverse the negative effects of the great recession. Proposed policies of President Donald J. Trump are expected to further drive inflation rates higher. President Trump is expected to push for up to $1 trillion from Congress to upgrade infrastructure, introduce major tax cuts, de-regulate industry, and implement a number of protectionist trade policies in the coming year. These factors are all expected to drive inflation higher.

Outside the U.S., other signs are surfacing as well. The Eurozone recorded a 1.8% rise in consumer prices (YoY) in January, despite a turbulent Brexit vote and plummeting currencies. Factory prices in China are rising and wages in Japan have risen to their highest levels since 2010.

Why should investors care about inflation?

  • Rising inflation positively impacts borrowers of existing debt (if real interest rates are negative), producers that experience prices rising faster than costs, and workers with strong wage bargaining power.
  • Adversely, inflation negatively impacts workers with low wage bargaining power (including fixed incomes), lenders, businesses with high wage pressures, and investors whose returns cannot outpace inflation over the long term.

How can investors prepare?

Investors should remain invested in a diversified portfolio over a reasonably long period of time in order to protect and grow purchasing power to sustain their standard of living in the future. Brinker Capital is committed to helping investors create the purchasing power needed to pay for personal, financial or lifestyle goals.

For 30 years, Brinker Capital has provided investment solutions based on ideas generated from listening to the needs of advisors and investors. From being a pioneer of multi-asset class investments to using behavioral finance to manage the emotions of investing, our disciplined approach is the key to helping clients achieve better outcomes.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.