Are Your Long-Term Investments Protected Against Inflation?

May 20, 2021 - Last month, inflation rose at its fastest rate since the economic recession of 2008. The U.S. Bureau of Labor Statistics recently reported that in April, headline inflation, which includes energy and food prices, jumped 4.2% from a year ago. Understandably, this spike has some long-term investors and endowed institutions concerned about the impact higher inflation could have on their investment funds.

Our take? While it is difficult to predict inflation, we expect the recent uptick will be relatively short-lived and will settle over the next 12 to 24 months closer to the U.S. Federal Reserve’s 2% target. 

Several factors give us reason to believe inflation will subside from last month’s pace:

  1. Price levels in April 2020 were severely depressed due to the pandemic, amplifying the year-over-year comparison. Compared to pre-pandemic inflation levels, last month’s increase was just over 2.0%.
  2. As the economy has begun to more fully open, pent-up demand for goods and services by consumers and businesses has resulted in supply chain imbalances. As retailers and producers struggle to catch up, these supply chain imbalances have caused price increases that we believe will be short-term. Moreover, it’s not unusual for inflation to jump after periods of economic recession.
  3. The “break-even” inflation rate expected by the bond market suggests inflation will average between 2.3% and 2.7% over the next five to ten years.

Even if the current inflationary pressures will likely recede, what should long-term investors do to protect against inflation? The best way for long-term investors to protect against inflation is to include strategic allocations to investments with inflation-hedging qualities in their investment portfolios. In addition to improving overall portfolio diversification, so-called “real assets” like real estate, infrastructure, minerals and other commodities, and Treasury Protected Securities (TIPS) can also work to preserve a long-term portfolio’s real value should future inflation exceed expected levels.

HighGround recently added a new Liquid Real Asset Fund to our investment platform to include in the strategic allocations of our multi-investor commingled endowment funds. If you would like more information about real asset investments or to discuss ways to insulate your portfolio from the potential ill-effects of inflation, contact our investment team today at 214.978.3300.