In general, when rises in the Consumer Price Index (inflation) are moderate, the bond market will rally, and when increases in the CPI are significant, the bond market will collapse. When it comes to CPI data, the equities markets tend to follow the same pattern as the bond market. In other words, when CPI statistics are low, the equities market will (usually) rise since low inflation leads to low borrowing rates, which is good for corporate earnings.
But, if inflation rises, will some S&P 500 sectors do better?
Inflation rose in November and December
The Consumer Price Index for All Urban Consumers gained 0.4 percent in January, after climbing half that amount (0.2 percent) in November, according to the US Department of Labor. Furthermore, according to the United States Bureau of Labor Statistics:
- Before seasonal adjustment, the all items index gained 1.4 percent over the previous 12 months.
- The 8.4% increase in the gasoline index, which accounted for more than 60% of the entire increase, drove the seasonally adjusted increase in the all items index.
- The food index gained 0.4 percent in December, with both the food at home and food away from home indices rising.
- In December, the index for all products excluding food and energy increased by 0.1 percent.
- In addition, the clothes, auto insurance, new vehicle, personal care, and home furnishings and operations indexes also increased in December. The used car and truck, recreation, and medical care indices were among those that fell during the month.
Where to invest during rising inflation
In general, financial gurus believe that cash is one of the worst asset classes to hold during periods of rising inflation. In theory, some industries should fare better than others if inflation rises.
When there is substantial inflation, for example, corporations will pass on the increased costs to consumers, correct? And it stands to reason that if you and I become more careful in our purchases, we may forego some luxury items (such as jewelry), but we will continue to buy fundamental requirements (like bread and milk). That explains why the Consumer Staples sector performs better and the Consumer Discretionary sector performs worse during rising inflationary periods.
Gold (and gold stocks)
When inflation is on the rise, institutional investors generally resort to perceived “safe” products like gold and gold stocks. Why? Because gold is regarded as a safe refuge during times of economic uncertainty.
Utilities sector
Utilities are considered defensive because we all require them (think electricity, heat, gas, and so on) regardless of inflation. And, because energy firms pass on any additional expenses to us, they can keep their profits.
Real estate sector
Real estate is frequently used as a hedge against inflation. Consider the sector’s biggest player: REITs (Real Estate Investment Trusts). Property values and rental revenue tend to grow when inflation rises, hence REITs own and run income-producing real estate. Furthermore, REITs are obligated by law to yearly distribute at least 90% of their net earnings to shareholders.
Allocations matter
Want more proof that asset allocation and diversity are critical to portfolio returns? Consider the following sectors’ performance last year (with the exception of Gold):
Which industries are the most affected by inflation?
Inflationary times tend to favor five sectors, according to Hartford Funds strategist Sean Markowicz: utilities, real estate investment trusts, energy, consumer staples, and healthcare.
Which industry benefits from inflation?
When inflation was low (below 3% on average) and rising, equities outpaced inflation 90% of the time, according to our analysis. When inflation was strong (over 3% on average) and rising, however, equities performed as poorly as a coin flip, as illustrated in the chart below.
What is the impact of inflation?
Inflation lowers your purchasing power by raising prices. Pensions, savings, and Treasury notes all lose value as a result of inflation. Real estate and collectibles, for example, frequently stay up with inflation. Loans with variable interest rates rise when inflation rises.
What works well in times of inflation?
With inflation, real estate works wonderfully. This is due to the fact that as inflation rises, property prices rise as well, lowering the amount a landlord may demand for rent. As a result, the landlord will be able to collect a bigger rental revenue over time. This allows you to keep up with the rising cost of living.
What industries do well during a recession?
Healthcare, food, consumer staples, and basic transportation are examples of generally inelastic industries that can thrive during economic downturns. During a public health emergency, they may also benefit from being classified as critical industries.
What industries will prosper in 2022?
- Oil, gold, automobiles, services, and housing are among the main market sectors to monitor in 2022.
- Tapering, interest rates, inflation, payment for order flow (PFOF), and antitrust are all major areas of concern.
- Expect political squabbles over federal spending, the debt ceiling, climate change, and student debt to continue.
- The Consumer Financial Protection Bureau’s (CFPB) new director may influence policies.
- Jerome Powell, the chairman of the Federal Reserve Board (FRB), has been reappointed by President Biden.
- Three other seats on the seven-member FRB, however, will be filled by Biden’s nominees.
- Concerns about the labor market, such as the impact of COVID-19 vaccine mandates, should also be addressed.
- The new worldwide minimum corporate tax rate will begin to take shape, and multinational firms will be impacted.
What impact does inflation have on businesses?
Inflation decreases money’s buying power by requiring more money to purchase the same products. People will be worse off if income does not increase at the same rate as inflation. This results in lower consumer spending and decreased sales for businesses.
What impact does inflation have on the economy?
Inflation is defined as a steady increase in overall price levels. Inflation that is moderate is linked to economic growth, whereas high inflation can indicate an overheated economy. Businesses and consumers spend more money on goods and services as the economy grows.
What impact does inflation have on the stock market?
Consumers, stocks, and the economy may all suffer as a result of rising inflation. When inflation is high, value stocks perform better, and when inflation is low, growth stocks perform better. When inflation is high, stocks become more volatile.
Inflation favours whom?
- Inflation is defined as an increase in the price of goods and services that results in a decrease in the buying power of money.
- Depending on the conditions, inflation might benefit both borrowers and lenders.
- Prices can be directly affected by the money supply; prices may rise as the money supply rises, assuming no change in economic activity.
- Borrowers gain from inflation because they may repay lenders with money that is worth less than it was when they borrowed it.
- When prices rise as a result of inflation, demand for borrowing rises, resulting in higher interest rates, which benefit lenders.