Impact of Inflation and Raising Interest Rates on Stock Market and Your Investments
Stocks have had a volatile month of May. This is due mainly to the ongoing high inflation and fears that the Federal Reserve's efforts to control surging prices by raising interest rates will tip the economy into a recession. The upsurge in demand coming out of the pandemic and supply chain issues along with high energy prices are some of the primary drivers of inflation in the U.S. and Eurozone.
If you are following the news headlines, you are probably aware that the U.S. policymakers underestimated inflation threat last year. The current inflation rate* of 8.3% is running near its fastest pace in four decades. It’s wiping out pay raises while prices for gas, food, and housing continue to raise.
Based on the Gallup’s Economic Confidence Index, public confidence in the economy is the lowest it has been since the end of the Great Recession in early 2009. The survey shows the inflation perceived by Americans as one of the top U.S. problems. **
When planning long-term, you should assume some level of inflation over the time span of your plan. While higher rates of inflation can cause problems with your plan, it is possible to address them by regularly monitoring progress and adjusting as needed.
With inflation expected to stay elevated throughout the year, investors should address inflation's effects on their portfolios because if they don't, inflation can erode their portfolios’ returns and negatively affect their purchasing power.
To minimize the impact of inflation, consider inflation-protected securities and/or investments that tend to hold up well in inflationary environments.
Please feel free to contact me to find more information about these investments or to help you with your long-term plan.
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*US Inflation Calculator Rate, April 2022 **Economic Pessimism Growing in U.S./Gallup, May 31, 2022