There is no denying that inflation in 2022 is real. As we see the impact that inflation is having on our everyday basics, like food and gas prices, it is only natural that concerns will set in for those struggling to navigate the complexities of the current market.
A recent study from Hartford Funds exploring investors’ understanding of elevated inflation and the role of the U.S. Federal Reserve (“the Fed”), and how they impact their investment decisions, found that elevated inflation remains an area of concern for most investors (94%). However, younger generations worry more about inflation impacting their day-to-day finances than older generations (78% vs 71%).
This result is a bit surprising at first, as conventional wisdom suggests that older generations would be more concerned. Historically we associate inflation with a longer-term erosion of wealth, and generally focus our attention on individuals who rely on their savings to pay for their expenses in retirement, i.e., older generations. Presumably, younger generations, who are still in the workforce, benefit at some point from rising wages, which typically helps contribute to the elevated inflation.
However, the 78% stat shouldn’t really be a surprise. First off, no one can hide from the inflation headlines inundating the media across both financial and nonfinancial sources. Research has shown that younger generations spend on average one hour more per day looking at their phones, which translates to around 56 days each year for millennials versus 39 days for boomers. But it’s not just about the news. Inflation becomes a serious, more tangible issue for most people when food prices jump 8.8% and gas prices jump 18% in one month. Couple those increases with that fact that younger generations typically have less disposable income than older generations, and it shouldn’t come as a surprise that younger investors are concerned.
Despite their concerns about inflation, however, our survey also found that investors of younger generations struggled to correctly define inflation, compared to older generations (54% vs 86%). Considering that millennial and Gen Z investors haven’t experienced the high levels of inflation afflicting us today, this gap is unsurprising. What is also to be expected, though, is their relative inexperience of how to navigate an inflationary period.
One thing these younger generations should keep in mind is that there is a precedent that suggests this high inflationary era may pass relatively quickly. There have only been six periods of time since World War II that the Consumer Price Index (CPI) has been over 5%. In five out of six of those periods, the average time it persisted was 1.5 years. It’s also worth noting that while the CPI hit 8.5% in March 2022, that’s the highest it’s been since the early 1980s. Moreover, having taken cues from the past, the current Fed has already instituted 75 basis points of hikes and is signaling more to come to help tame inflation.
Another key component to riding the inflation wave is to think long term, rather than making immediate market moves and attempting to offset short-term losses. Luckily, younger investors are at an advantage in that they have more time to invest and can afford to play the long game. A good first step is to build and maintain a diversified portfolio that is well-positioned to weather market fluctuations longer term, and there are several asset classes that might help mitigate the impacts of rising inflation. For example, equities have historically proven to outpace inflation over the long term. Though a riskier asset class in general, commodities have also performed well during inflationary periods, given that commodity prices tend to rise in tandem with inflation.