Inflation has been largely talked about for the past several months and many people see its effects directly in places like the grocery store or utility bills. In June, the Federal Reserve approved their biggest interest rate increase since 1991 with a primary goal of getting inflation under control.

Understanding the options available to you to help plan ahead for your future and minimizing the impacts of inflation is important. Our financial professionals are here to help guide you through that process and ensure that you have a plan that meets your needs.

Here are three action steps you can take to respond to rising inflation:

• Invest in brokerage accounts and employer sponsored retirement plans. The average annualized returns of S&P 500 is around 10%. This, in addition to opening a brokerage account for additional savings where you can take advantage of compounding can be extremely important for beating inflation. A diversified investment portfolio is also crucial.
• Evaluate real estate and commodities. Tangible assets, such as commodities and real estate can also be beneficial for combating inflation. Even Warren Buffett has talked broadly about investing in real estate as a way to deal with inflation problems.
• Look for tax efficiency opportunities. Anytime you can sit down and reevaluate your tax strategy is beneficial. Investments that tend to lose less of their returns to taxes are better suited for taxable accounts, whereas those that lose more of their returns to taxes should be designated to tax advantaged accounts.

Sit down and talk with your team of financial professionals to decide what is most appropriate for you and the strategies aligned to help you achieve better benefits with inflation.

How many times have we heard some version of the phrase ‘past performance does not guarantee future performance’? And, well, it’s true. It doesn’t guarantee future performance. But there is a lot we can learn from the past. In the article below, Dr. Crill uses the breakeven inflation tool to explain why the market might be telling us that it does see inflation getting under control in the near future. Hopefully sooner than later because of these gas prices…

Hope it helps!

-Neel

At some point over the past year, the financial media’s inflation coverage transitioned from, “Will this high inflation persist?” to, “Here’s how to cope with inflation that’s here to stay!” It seems some investors have resigned themselves to a new normal of high inflation following decades of below-average consumer price changes. However, financial market data tells a different story, one of potentially softening inflation. Breakeven inflation (BEI) rates offer a window into the market’s inflation expectations. Defined as the difference between yields on nominal and inflation-protected bonds of the same maturity, BEI represents the inflation rate at which investors would be indifferent between the two. If actual inflation were to exceed BEI rates, investors would be better off with the inflation-protected bond; if inflation were less than BEI, the reverse would be true. BEI is therefore commonly interpreted as the average annual inflation rate expected over a given time horizon.1 The one-year BEI shows a spike in inflation expectations this year following increasingly high consumer price index (CPI) changes. But the trajectory appears to have changed course over the past couple of months (see Exhibit 1). Since peaking at 6.3% in late March, the one-year BEI had fallen to 5.2% as of June 10. This might be the market’s way of telling us it sees inflation getting under control in the near future.

It is important to remember that realized inflation can diverge from expectations. For example, the one-year BEI rate as of May 3, 2021, was just 2.7%. Over the next 12 months, CPI grew by 8.3%, meaning a substantial portion of this inflation seemed to have been unexpected by the market. From January 2007 to April 2022, the difference between actual inflation and that “predicted” by BEI varied from –5.59 to 8.43 percentage points.2 While nominal (i.e., not inflation-protected) bond prices reflect expected inflation, investors who opt for Treasury Inflation-Protected Securities (TIPS) or approaches that overlay inflation swaps (“real return” bond strategies) get compensated for actual inflation. Investors who want to reduce uncertainty in the event of higher-than-expected inflation may benefit from these inflation-hedging approaches.

By: Wes Crill, PhD
Head of Investment Strategists and Vice President

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value Dimensional Fund Advisors does not have any bank affliates.

So, we all talk about what exactly is Inflation? Inflation is a general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

Now that we’re on the same page about it, what should you do to protect your personal finances during times of high inflation?  Well, there a handful of things you may consider with your advisor but here are three personal finance tips to consider during times of high inflation :

1) The name is Bond. James (just) Bonds.

• When inflation is higher than the fixed rate of a bond, you’re losing the purchasing power of your money.
• Owning a bond is like making a loan:
  • A Treasury bond lends money to the federal government.
  • A municipal bond lends money to a city or state.
  • A corporate bond lends money to a company or corporation.
• The other side of owning a bond is borrowing. When the mortgage rate is lower than the inflation rate, the bank is taking the bad end of the deal.

2) Wicked Smaht Debt.  Investing vs. paying off your mortgage

• When fixed income rates were much lower than mortgage interest rates, we suggested that clients pay off their mortgage with extra income rather than invest the money.
• Recently, mortgage and fixed income rates are equalizing, so we are coming to the point where it may make more sense to invest your money than pay off your mortgage.

3) Beware the Big Bad Wolf blowing your house down. Re-examine your homeowner’s insurance

• Since home values, raw materials and labor have dramatically increased, it’s important to have enough coverage to replace your existing home in the event of a disaster.

If you are worried about how inflation impacts your retirement & financial foals.