Inflation Outlook: Did the Experts Get It Wrong?
Inflation has been dominating the financial headlines for weeks. More importantly, the financial markets are taking their cues from this economic reading, falling repeatedly in recent weeks upon indications that inflation may be harder to control than the US Federal Reserve and other policymaking bodies originally thought.
According to many analysts, the Fed and others may have underestimated the inflationary impact of the huge influx of cash into the economy in response to the pandemic lockdowns and following recession. As a result, they suggest, the inflationary horse may already be out of the barn, and corralling it again without tipping the US economy into a recession could be impossible.
It is true that inflation has already exceeded the estimates of a number of analysts. For example, billionaire investor Jeffrey Gundlach told CNBC in October 2021 that he expected inflation to run at a 5% rate in 2021 and to exceed 4% for 2022. As it has turned out, the latest reading on the Consumer Price Index (CPI) has pegged inflation at an annual rate of 8.3% for the 12 months ending in April 2022—considerably higher than the range suggested by Gundlach.
What matters most, of course, is what lies ahead for inflation and the US economy, and as usual, predictions range from moderating inflation and a “soft landing” for the economy to worsening inflation and an eventual recession. Recently, lower-than-expected earnings reports from major retailers like Target and Walmart spooked many investors, who interpreted the data as an indication that inflation was dampening consumer spending at damaging levels. As a result, the equity markets saw sharp declines, moving the S&P 500 into bear market territory (a decline of 20% or more from market highs). But it’s also worth noting that some analysts—including worldwide accounting firm Deloitte—predict that current rates of inflation may be “transitory” and could settle at a rate of around 5.5% for 2022 before easing to levels around 2% in future years.
As the old stock market proverb goes, “Predictions are difficult, particularly when about the future.” The important thing for investors to remember, though, is the importance of having a long-range plan in place that takes into account their particular goals, objectives, and position in the life cycle. Especially during times of market volatility such as the present, sticking to the plan—rather than reacting emotionally to the latest financial headlines—is vital for the long-term success of your financial plan. This is also where a professional, fiduciary financial advisor can be of tremendous benefit.
At Bernhardt Wealth Management, our fiduciary duty to place our clients’ best interests first in every circumstance ensures that every recommendation is driven by the latest evidence-based investment and economic research. Our sole aim is to provide our clients with the information and guidance they need to navigate the ever-shifting financial markets and meet their most important goals. To learn more, click here to read our recent article, “The Fed, the Economy, and the Financial Markets.”