Inflation has risen to its highest pace in nearly 30 years. In this Fool Live video clip, recorded on June 21, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss how this could affect the stock market and what investors can do to prepare.
Jason Moser: I think the conversation over the last decade was, "Well, inflation and checks on rates will stay low and moving on," and now we're at a point where inflation is starting to become a bit more of a concern, and we've seen the Fed is accelerating its timeline a little bit. We're seeing how banks are going into this period of time, how they are preparing themselves. It just it seems like there's a lot to discuss in regard to this. Let's just start off with the Fed meeting from last week. I personally wasn't terribly surprised to see the headlines that they are essentially accelerating their timeframe on when they plan to raise interest rates next. It's been so long. The status quo, at some point or another, you got to start having that other conversation, and it sounds like the Fed is accelerating that timeframe. What do you think there?
Matt Frankel: Yes. We're not used to being in this type of situation where there's real inflation happening. Do you remember the last time we were in a real inflationary environment? It had to be in the '90s.
Moser: I would imagine that was it. It certainly didn't feel like it's been anything over the last couple of decades.
Frankel: In the last decade, like since the financial crisis. The Fed has tried. They can't buy an inflation rate. They tried to. Remember they've had this 2% target for 12 years now and they just can't get there. They've edged up against that once or twice, but they just can't get there, and now we're seeing, I just run through some of the numbers, the CPI is up 5% year over year, as at the latest data. The PPI, the Producer Price Index, is up 6.6% year over year. These are the highest inflation numbers in about 30 years. Core inflation is up 3.8% when you back out things like energy, which tends to be the most volatile part of it.
Moser: Sure.
Frankel: We talked about this a few shows ago that inflations is generally bad for stocks, right?
Moser: Yes and no. Yes, but by the same token, one less than we've always used with our Fool School, and when we're teaching younger folks the value of investing, and teaching them the dangers of inflation. If you just put that money at a piggy bank, overtime, it ultimately really is losing value. Whereas if you're invested, you've diversified, you do it in the good times and the bad, that is really going to be one of the greater ways, one of the best ways to counter that inflation but go on.
Frankel: I'm glad you brought up that your money is losing value just sitting there.
Moser: Yeah.
Frankel: Investors, it's important to focus on real returns. Real returns are the difference, of course, between your actual investment returns in the inflation rate. If inflation is at 3% a year and your portfolio went up by 7%, your real return was 4%. The difference between them.
Moser: Yeah.
Frankel: Historically, the sweet spot is 2%-3% inflation, which is why the Fed targets that range. Stocks have generally produced the best of real returns in periods where inflation is between 2% and 3%, if you go back like 50 years. We're a little above that now, which is scaring investors. That's why we're having this whole conversation. Just a couple of things and then I'll get into some specifics on why we're seeing all this inflation and all that. Generally, value stocks tend to outperform growth stocks, which is great for us at the financial show. You want to focus on stocks that have pricing power. Some stocks have the ability to raise prices along with inflation without losing any demand whatsoever. Utilities are a great example. If my electric company raised rates by 5%, I would still be turning my lights on it as much as I am now. That's a perfect example of a company with pricing power. Financials that we've talked about to some degree, they don't do great in a hyperinflationary environment. But when inflation is a little high, they get to raise rates, and they make more money on loans, things like that.
