How investing can protect against inflation

investing and inflation

It’s no secret that the prices of everyday purchases are rising quickly due to strong consumer demand and supply chain problems. Not only does this impact consumers’ wallets but it also has wide-ranging implications for investment portfolios. However, it’s important to keep inflation, consumer sentiment, and the overall growth of the market in perspective when making long-term financial decisions. After all, some of the same factors that have pushed up the prices of goods have also affected stock prices, home values and more.

Prices have increased significantly in the last year

In January 2022, the Consumer Price Index (CPI) rose by 7.5% over the previous year, the fastest pace since 1982. This was fueled by: 

  • the rising prices of everyday necessities like food and energy (which rose 7% and 27%, respectively). 
  • supply chain disruptions, which continued to affect other major categories, most notably vehicle prices (which rose 12.2% for new cars and 40.5% for used ones). 

Other recent economic data shows that the prices charged by producers rose 9.7% year-on-year.

How inflation can affect your everyday life

Inflation affects our everyday lives in several ways and, naturally, this disproportionately hurts consumers who have tight budgets or who are in or near retirement. However, it also affects those who do not have diversified investments.

Chart: Inflation is at its highest level in 40 years. This erodes the value of cash and savings over time. Holding an appropriate investment portfolio can help offset this risk.

Chart, line chart

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Sources: Clearnomics, FDIC. For illustrative purposes only

Diversification is more important than ever

All this underscores the need to hold an appropriately diversified portfolio designed to offset rising expenses and protect savings and wealth. Specifically, this means being aware of spending requirements relative to portfolio yield and other sources of income. The average savings account or certificate of deposit not only isn’t keeping up, but its value can be quietly eroded over time.

This highlights the benefits of holding other types of financial assets. For instance, many areas of the stock market can benefit as companies increase their prices. Thus, inflation can be a double-edged sword which can hurt consumers but help investors. If sales and earnings growth remain steady, history shows that the stock market and investment portfolios can benefit over time.

This could be why, despite the hit to pocketbooks, household net worth in the U.S. is at a record of nearly $145 trillion. This  can also create a “wealth effect” that supports long-term consumer spending beyond the initial recovery. Thus, it’s important to consider the full consumer income statement and balance sheet when evaluating the impact of inflation.

Thus, as always, it’s best to hold a portfolio that can withstand different economic conditions in order to stay on track to achieve long-term financial goals. 

You’re not an investing whiz, you say?

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This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, MoneyLion does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information. For more information about MoneyLion, please visit advisory services provided by ML Wealth LLC. Investment Accounts Are Not FDIC Insured • No Bank Guarantee • Investments May Lose Value. For important information and disclaimers relating to the MoneyLion Investment Account, see Investment Account FAQs and FORM ADV. Accounts are subject to an administrative fee of $1 per month.

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