Understanding Inflation in 2021: What Investors Need to Know

As the economic instability from COVID-19 gives way to an economic resurgence, it appears that many of us are turning our attention to something that’s been around for decades but has recently piqued national interest - inflation. In fact, a recent study found that people are Googling the word “inflation” at a rapid rate, with a peak not seen since 2008.1   

Since the start of the COVID-19 pandemic, six major stimulus bills totaling around $5.3 trillion have passed. With these efforts to alleviate pandemic-fueled financial strife, are inflation levels being impacted?

Federal Reserve Chair Jerome Powell has said that inflation is likely to pick up as the economy recovers from the pandemic, but he believes it will be temporary. Current data support his view, with 5-year breakeven inflation expectations lower than 10-year inflation expectations. Powell has also stated that the central bank plans to keep short-term rates anchored near zero through 2023.2  

As you consider any potential adjustments due to inflation, here’s a reminder about what inflation is and how it can affect you and your wealth.

What Is Inflation?

Inflation is defined as an upward movement in the average level of prices. As prices rise your $1 buys less. 

Consider the price of milk over 100 years (1913-2013):

In 1913, nine cents would buy a quart of milk. Fifty years later, nine cents would only buy a small glass of milk.

And 100 years later, nine cents would only buy about six tablespoons of milk.




$0.09 = 1 Quart

$0.09 = 1 Small Glass

$0.09 = 6 Tablespoons

In US dollars. Source for 1913 and 1963: Historical Statistics of the United States: Colonial Times to 1970/U.S. Dept. of Commerce. Source for 2013: United States Department of Labor, Bureau of Labor Statistics, Economic Statistics, Consumer Price Index–Average Price Data.

How to 'See' Inflation In Real-Time

Each month, the Bureau of Labor Statistics releases a report called the Consumer Price Index (CPI) to track fluctuations in prices.

The CPI was developed based on information provided by families and individuals on purchases made in the following categories:3  

  • Food and beverages
  • Housing
  • Apparel
  • Transportation
  • Medical care
  • Recreation
  • Education and communication
  • Other groups and services

While it’s the commonly used indicator of inflation, the CPI has come under scrutiny. For example, the CPI rose 1.4 percent between January 2020 and January 2021 – a relatively small increase. A closer look at the report, however, shows the movement in prices on various goods tells a different story. Used car and truck prices, for example, rose 10 percent during those 12 months.4 

Inflation & You

Since money today will likely buy less tomorrow, one solution is to seek investment growth on a specific portion of your portfolio. If your invested dollars grow sufficiently, your purchasing power should remain the same. Towards confronting this challenge, we build personalized portfolios and financial plans that expect inflation to decrease the value of a dollar between two and four times over a lifetime. 

Inflation can also affect your investments in several other ways. Beyond its eroding effect on purchasing power, it can reduce your rate of return and influence the Federal Reserve.

Rate of Return

Inflation reduces the real rate of return on investments. Say an investment earned six percent over a 12-month period. During that time, let's say inflation averaged about 1.5 percent. That would mean that your investment’s real rate of return would have been 4.5 percent - not six percent.

The Federal Reserve

In addition, inflation can attract the attention of the Federal Reserve. If they want to take action to influence inflation, the Federal Reserve has several tools to reduce the amount of money in circulation. Hypothetically speaking, a smaller supply of money means less spending - which could equal lower prices and lower inflation.

Next Steps

With so many changes over the past year or so - and with the CPI rising 4.2% between April 2020 and April 2021 and 5.0% between May 2020 and May 2021 [updated June 10, 2021]5- it is no wonder investors and consumers are concerned about the rate of inflation today. When inflation is low, it’s easy to overlook how rising prices are affecting a household budget. And when inflation is high, it garners the attention of the media and may make it more tempting to question if changes to your financial plan and portfolio are necessary. 

If you’re concerned about the inflation rates we’re seeing in 2021, talk to us about your finances to determine if changes need to be made or if you and your portfolio are already well-prepared.

Our Clients Are Well-Prepared 

Inflation is unpredictable, but it is also a known risk. Consider how we handle "known risks" in other areas of life: For example, homebuilders know all about earthquakes in California, and with those known risks in mind they build safe, beautiful homes. 

Similarly, we build portfolios and financial plans that seek to confront inflation head-on. We expect your cost of living to double, perhaps even quadruple, or more, over the average lifetime. We've positioned clients' portfolios to be well-prepared for this challenge.

  1. https://www.yahoo.com/entertainment/google-searches-reveal-people-are-growing-very-worried-about-inflation-163908703.html?guccounter=1
  2. https://www.cnbc.com/2021/03/17/fed-decision-march-2021-fed-sees-stronger-economy-higher-inflation-but-no-rate-hikes.html
  3. https://www.bls.gov/cpi/
  4. https://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp?reloaded=true 
  5. https://www.bls.gov/news.release/pdf/cpi.pdf

This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.


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