Is inflation on your mind? It would be surprising if it weren’t. While we all have to weather inflation’s short-term effects, we have reason for optimism over the long term. Here’s a look at where we are right now.
Inflation, labor shortages, and supply chains
The effects of nearly two years of the pandemic compounded by the Omicron variant’s impact hamper economic recovery as we face labor shortages, supply chain disruptions, and inflation. Recent inflation has been attributed to shortages caused by supply chain issues and increased demand as the economy reopened, but if the tight labor market continues to bring higher wages, there may be longer-term implications. So far, long-term projections of inflation remain in the 2 – 3% range, but short-term inflation through December 2021 was 7% annualized, a 40-year high.
What does higher inflation mean to our financial lives?
Housing, transportation, and food costs are the largest components of inflation for consumers, but the changes in work brought on by the pandemic may give consumers more ways to stem inflation’s effects. Many who are typically most affected by inflation, including service employees and other lower-to-mid level workers, now have more options. We are already seeing major shifts in housing as those who have some work flexibility move from higher-cost areas to lower-cost ones to maintain or enhance their quality of life.
Staying invested helps outpace inflation over the long run
For investors, equity markets have proved to be a strong hedge against inflation over time. Most recently, during the 30 years from 1991 through June 2021, the S&P 500 posted an average annualized return of 8.5% after adjusting for inflation. Going back to 1926, the annualized inflation-adjusted return on stocks has been 7.3%. While there will always be short-term disruptions and periods of negative returns, history shows that stock market returns tend to outpace inflation.
Rising prices do not necessarily make it harder to reach your goals. For those who may be particularly sensitive to unexpected inflation, inflation-sensitive asset classes and inflation-indexed bonds can offer protection.
Resilience and innovation
It’s likely that the pandemic will yield enduring changes to how we live and work. We, as a society, are proving our resilience. It is likely that markets will prove their resilience, too. Over time, financial markets find new opportunities and innovate. These last two years would certainly not be the “opportunity” we would choose; but, as always, we adapt and move forward.
Now might be a good time to check in on your financial plan or get one started, especially if you’re feeling unsettled or have new financial goals.
 Dimensional Fund Advisors, September 17, 2021