Many newer investment advisors and consumers have not seen economic conditions like we have today. Seasoned advisors, who have experienced fluctuating markets and a variety of economic events in the past, are asked this question: should we worry? Let’s look at the current conditions facing the economy.
Current State of Economy
In June 2022, the Consumer Price Index (CPI) rose to a level of 9.1%. It has since retreated to 6.5% as of January 2023. Contributing to the rise of inflation is the war in Ukraine, which has complicated supply chains on the global food markets amid lingering issues created by the global pandemic.
Domestically, housing prices have risen and probably will take time to retreat. Overall, markets have been volatile and it’s been difficult to determine what to expect next with mixed explanations as to why it’s happening in the first place.
It seems there are endless headlines about the economy and its struggles, which only further plays into the psychology of the investor and consumer. As a result, purchases of goods and services have slowed as prices continue to accelerate upwards.
Although inflation has dropped from its 2022 highs, it’s still far above the Federal Reserve’s 2% target, leading to expectations that continued action will be needed.
Defining Inflation and the Federal Reserve’s Role
Inflation is defined as a rise in the price of goods and services over time so that fewer can be purchased with each dollar; the erosion of purchasing power is inflation. The Federal Reserve has two primary functions: maximize employment and price stability. There are several tools used to accomplish those mandates through monetary policy, which controls our nation’s money supply.
The United States economy is dynamic, complex and ever-changing. The money supply is binary, either expansionary or contractionary. We see that in today’s economy, which is contractionary due to the Federal Reserve raising interest rates to effectively lower inflation. In other words, the Federal Reserve slowed growth by limiting the money supply by increasing interest rates.
Currently, unemployment remains relatively low by comparison to the increased CPI at 3.4% as of January 2023. The concern among economists is balancing the two mandates: maintaining employment levels and bringing inflation back to the target interest rate to avoid the risk of a recession or worse, which is higher unemployment with sustained inflation.
What Actions Can You Take at this Time?
Keeping pace with inflation is a goal of many investors, particularly as they reach retirement. Attempting to try and outguess the markets and the short-term volatility it brings is very difficult.
The most important action an investor can take is maintaining a well-diversified and allocated portfolio rather than chasing short-term gains. Trying to outguess or make changes using different types of investment for the short-term may even create more disruption and harm.
It is important to talk with a Claris Advisor that has experienced different economic and market related events to understand how to stay focused on long-term goals, helping you to avoid the “worry.”
Contact Claris to see how our investment approach is designed to help you understand, invest and relax.