Heading into 2022, it seems the hottest topic in finance is the resurgence of inflation. Anyone who has shopped in a grocery store or filled up their gas tank in the last 12 months has seen this coming and it may get worse before it gets better. As a result, it’s likely that the equity market will continue forward with some volatility in both directions as investors digest the ever-changing market conditions.
It’s been 30 years since the last time we had 6% or higher inflation for a prolonged period of time. In that context, let’s consider a few data points that put the relatively short-term phenomenon of inflation into a bigger perspective.
To summarize, over the last 30 years, mainstream US equities have appreciated 1344%, income from those equities has increased 408%, and our cost of living has barely doubled.
Investors often debate what the best way to combat inflation is, and the truth is that it’s very difficult in the short-run because there are so many unknowable factors getting priced into the market each day. However, just as unpredictable as the market is in the short-run, it is equally as predictable in the long-run. Therefore, it seems the best answer to managing inflation is to keep your financial plan updated to account for short-term market fluctuations, and own a diversified portfolio of equities for the long-run.