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How Should I Prepare for Rising Inflation? Thumbnail

How Should I Prepare for Rising Inflation?

Mike Earl, CFP®, CPWA®


We’re starting to hear the “I-word” mentioned more often as of late. Inflation is on the rise.

The Federal government’s money printing machines have been on overdrive, and the US economy has taken note. Prices have begun to tick up across the economy – most notably in residential real estate.

The counterpoint (as made by the Fed) is the inflation we are seeing today is merely temporary, a hangover from the COVID shutdowns.

As measured by M2, the Money Supply is 30% higher today than at the start of 2020:

You don’t need a Ph.D. in math or economics to understand that our government is playing a risky game here. Compare the growth in money supply during the COVID era vs. the long-term trend:

That said, we’re an optimistic bunch here at The Wealth Group, so here are three Silver Linings to steady your nerves:

  1. The US is not alone in having an unsavory balance sheet. Throughout the West, developed market governments are making similar fiscal and monetary decisions (mistakes?). This doesn't make it all okay, but it means other nations don't look any better (save China and other Asian countries, but they have other challenges to face -- namely demographics due to low birth rates and generally low immigration levels).

  2. Innovation, creativity, capitalism, free-ish markets, and entrepreneurship are still on the rise globally. And much of that global innovation growth is found in the US.

  3. There is still a sense in which our country is These United States (as opposed to The United States). We are a nation of states that have some vestige of autonomy from the Federal government, in the form of taxes and other policy decisions. Thus, there remains a competition of sorts between the states to attract and retain businesses and citizens. American businesses and citizens can vote with their feet, by relocating from high-tax, high-regulation states (e.g. California) toward lower-tax and lower-regulation states like Texas and Florida. Austin and Miami are in a battle to become the next Silicon Valley.

What is an investor to do in the face of rising inflation?

The encouraging takeaway from the above chart is that asset class returns have historically been strong during periods of low and rising inflation.

It’s also a warning to folks sitting on too much cash, or with too heavy an allocation in bonds.

Yet, this is a small sample size. We’re looking at just 4 occurrences of this phenomenon over the past 33 years. The period we are in today could certainly be different than the past four.

Our team's mission remains the same: we are here to help our clients stay invested, stay diversified, and most importantly: have an anti-fragile long-term financial plan. A plan that won't be shaken by the inevitable bear markets and recessions we will face.