Keeping Up with Rising Costs

Inflation is taxation without legislation

— Milton Friedman

In July, we wrote about how inflation could affect us. Given that we have been experiencing muted levels of inflation for the past few years, the sudden increase in the cost of some goods and services over the past few months due to the return of demand after COVID-19 lockdowns has surprised some of us — prompting the media to pick up the story.

The key takeaways from our earlier article were:

• Inflation affects everyone differently and the magnitude of its effect will depend on our lifestyle choices and the types of goods we consume.

• If you are concerned about inflation on the longevity of your assets during your retirement years, a combination of portfolio and spending adjustments will give you the best chance of ensuring that your money lasts as long as possible.
  

Tangentially, you may also wonder whether stock returns will suffer if inflation keeps rising. Here’s some good news: Inflation isn’t necessarily bad news for stocks.

A look at global equity performance (see chart below) since the 1970s does not show any reliable connection between periods of high (or low) inflation and global stock returns (adjusted to SGD).

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Past performance is no guarantee of future results.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Since 1970, one-year returns on global stocks have fluctuated widely. Yet weak returns occurred when inflation was low in some periods, and 34 of the past 50 years saw positive returns even after adjusting for the impact of inflation. That was the case in the first six months of this year 2021, as well.

History shows that stocks tend to outpace inflation over the long term — a valuable reminder for investors concerned that today’s rising prices will make it harder to reach their financial goals.

Of course eventually, some level of high inflation may start to weigh down on the economy and hinder the performance of stocks. However, it is important to note that you should not assume a direct relationship between high inflation and poor performance of stocks as there are many other factors at play when that happens.

If you are concerned about your investments and would like to ask more questions, feel free to contact us for a second opinion.