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Advisors are likely fielding a steady stream of inflation-related questions this year and it's reasonable to surmise that the clients inquiring about rising consumer prices hail from a variety of age groups.
This is the first extended bout of inflation since the early-to-mid 2000s, meaning younger clients haven't grappled with surging consumer prices before and plenty of seasoned clients might not remember what it feels like.
Amid all the inflation chatter, advisors may be anxious to see the calendar turn to 2022 because the conventional wisdom today is that the Consumer Price Index (CPI) will cool off next. “Wisdom” is loosely used there because many of the “experts” predicting inflation will ebb in the new year are the same ones getting the persistent vs. transitory call wrong. That and they possess diminishing credibility on what's causing and solutions for rising consumer prices.
Advisors don't have the luxury of getting it half right (or outright wrong) the way economists do. Fortunately, they do have options when it comes to assuaging inflation-wary clients and helping them thrive during periods of extended CPI gains.
With Inflation, Communication Is Key
Well, communication is always key. Clients value it and smart advisors know as much. That's particularly true today with inflation running hot because many clients don't know what's causing the CPI to run higher. It's not their job to know. That's why they have advisors and advisors can easily articulate to clients what's triggering today's extend CPI upside pressure.
“Inflation is being caused by several factors converging at the same time. Unprecedented monetary and fiscal policies to get the global economy rolling to pre-pandemic levels coupled with pent up demand and supply constraints have led to the current inflationary pressures,” according to VanEck research.
Translation: The Federal Reserve rushing to cut interest rates to historic lows in the early days of the coronavirus pandemic coupled with massive amounts of government stimulus are among the reasons inflation is proving persistent and why the Fed might be forced to raise rates next year.
Something else for advisors to consider is that clients are likely hearing about elevated costs for Thanksgiving and the notion, albeit politically motivated, of a blue Christmas. Of course, clients want to separate facts from fiction. Advisors can help them accomplish that objective with hard and fast data, though it's not all good news.
“Inflation is broadening, and this is challenging the transitory inflation narrative. Over the past year, U.S. inflation (as measured by the CPI) rose 5.4%, the U.S. Producer Price Index (PPI) gained 8.3%, and EU CPI (as measured by the Harmonized Index of Consumer Prices) reached a 13-year high of 3.4%,” adds VanEck. “The Personal Consumption Expenditures Price Index gained 4.3% year-over-year, its highest level in 30 years. Core PCE, which strips out volatile energy and food components is the Federal Reserve’s (Fed’s) preferred measure to gauge inflation and has set 2% as its target level. The Core PCE Index slowed slightly from July to August but is still up 3.5% from last year.”
The Boat Hasn't Been Missed
Owing to the fact that inflation has been persistent for essentially all of 2021, clients are also pondering if they've missed the run-up in assets that are positively correlated to higher CPI ratings.
That's a relevant concern when considering and real estate are two of the best-performing sectors in the S&P 500 this year and other inflation-positive assets are delivering, too. VanEck points to energy as a prime example of an inflation-sensitive sector that could offer more upside.
“We believe companies in this area, particularly within energy, industrials metals and gold, have healthy balance sheets, attractive valuations and the ability to generate significant free cash,” said the fund issuer. “Many companies also exhibit what we view as fascinating longer term growth profiles as direct inputs and beneficiaries of the resource transition movement fueled by technological advances and sustainability. The movement towards green energy is creating what has been dubbed by some as 'greenflation'. The world remains dependent on traditional energy, most notably oil, but investments are being diverted towards clean energy initiatives.”
Bottom line: If advisors communicate with clients, keep them off the inflation ledge and extol the virtues of keeping an open mind, clients won't just value the communication, they'll likely thrive even if inflation remains with us over the course of 2022.
Related: Don't Write Off Tech Just Because Inflation Persists