Zacks Investment Management

Lindsay T. from Farmington, NM asks: Hello Mitch, I’m sure you hear from a lot of people about inflation concerns. I’m retired and have my nest egg and social security to live off of, so if prices for food and gas and other goods keep going up, I’m worried I could be in real trouble. Do you think this problem will get better soon?

Mitch’s Response:

Thanks for writing and I empathize with your concerns. You’re not alone in being worried – a recent poll I saw found that 9 in 10 Americans are concerned about inflation, and 6 in 10 are “very concerned.” At the end of last year, less than 50% of Americans were worried.¹

The inflation problem persisted in April – the consumer price index registered at 8.3%, which marked a decline from the 8.5% print in May but still reflects inflation that’s running too hot. To be fair, high inflation readings are being pulled up by outliers like-new car prices and airfares that are rising quickly, but consumers are still feeling it in everyday life, particularly with higher gas prices.²

I feel confident that the inflation rate will come down in the second half of the year, perhaps even by half. My look at inflation-linked bonds and derivatives shows that the market is predicting about 3.5% inflation by 2024, and the 10-year U.S. Treasury – which is generally a good proxy for the market’s expectations for inflation – is still hovering around 3%.

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The rationale behind inflation improving is that the supply disruptions that caused inflation in the first place appear to be getting better. The long lines of container ships awaiting entry to California’s ports have dwindled, and freight rates have declined substantially. Factories in Asia are also operating at a higher capacity than they were six months ago, which should help.

The one wildcard for 2022 inflation is China, in my view. There is a good deal of uncertainty over how far China will go in pursuing its zero-Covid policy. China is responsible for nearly one-third of global manufacturing output, and recent lockdowns in manufacturing hubs like Jilin province and major cities like Shenzhen and Shanghai have shuttered factories and stores and resulted in a drastic decline in exports. China’s exports rose 3.9% in April year-over-year, a sharp fall from the 14.7% growth rate posted a month earlier.

At the same time, about 75% of China’s largest 100 cities by GDP have loosened or removed restrictions, so there has been a neutralizing effect. If China can resume operating at full capacity sooner than later, the supply chain problem should not contribute much more to inflation – a good thing.

The final factor that may help inflation later in this year and 2023 is the U.S. consumer shifting spending from goods to services. There was too much demand for goods that were in short supply, and it drove up prices. Spending more on services should allow the economy time to replenish inventories and resolve supply chain issues. In short, hang in there and perhaps consider altering your spending habits in the near term. I think the inflation issue will get better in the next year.

Overall, if you’re worried about the impact of inflation on your portfolio, remember to not panic! Inflation may be rising, but there are steps you can take to prevent it from affecting your long-term investments!

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Disclosure