Over the last six months, we’ve seen inflation rates steadily rise, jumping to a 40-year high of 8.5% in March. Gas, food, and housing costs have surged, and with the war in Ukraine still raging, we’re likely to see more increases in the future. Early 2022 indicators suggest this trend may be more than just transitory, prompting the Fed to raise rates for the first time since 2018.
It’s understandable why investors are rattled by inflation the likes of which we haven’t seen in decades. However, it’s important to remember—and help your clients remember—that sustained periods of inflation are actually rare in U.S. history. In fact, there has only been one instance of inflation exceeding 5% for 10 consecutive years (1973-82). While that was a very tough period in U.S. economic history, there have only been seven instances of consecutive years with 5% inflation (and two of those were in the 1800s). While extended periods of inflation can happen, they are infrequent.
While that history lesson may soothe some anxiety, it probably won’t erase all investor concerns, many of which were revealed in a recent poll of consumers by the Nationwide Retirement Institute.
Older Investors Have Seen This Before And Are Bracing For The Worst
According to our poll, over half of American consumers are pessimistic about the direction of the economy going forward. Older generations have an even more negative outlook, with over 60% of boomers and Gen Xers saying the economy is getting worse, not better. Some of these folks likely have not-so-fond memories of the last period of sustained inflation. Throughout the 1970s and early 1980s, inflation spiked to double-digit levels, peaking at nearly 15% on a year-over-year basis in 1980. Current inflation levels remain a far cry from those extremes, but that doesn’t make the pressure of today’s higher prices feel less painful.
For advisors and financial professionals working with clients that bring a more cautious or pessimistic view of the economy, it’s important to make them feel heard. However, one shouldn’t let near-term challenges unduly impact long-term investment decisions. Remind your clients that the U.S. economy is actually performing better than some dark news headlines may suggest. Despite the real near-term pain of inflation, we’re still in the midst of an economic expansion with job and wage growth remaining strong. Even with rising prices, retail sales have been robust.
Now may be a good time to fine tune portfolios of older clients based on the current economy, but it’s likely the bulk of their existing long-term plan is probably still on target.
Younger Investors Are Less Knowledgeable/Concerned
Younger Americans, especially Generation Z, seem less aware of the impact of inflation. Only about one-third of Gen Z consumers say they’ve seen their purchasing power decline, while two in five say it’s held steady. There also seems to be less concern about inflation among younger consumers; in our poll, just 35% of Gen Z reported being very concerned about inflation.
Despite low levels of awareness or concern, rising inflation appears to be having some impact on younger Americans’ financial choices. Gen Z and millennial consumers are more likely to postpone or cancel buying a home or vehicle because of inflation. They’re also holding off on hosting a wedding or starting a family because of rising prices.
Some are also making decisions that could carry longer-term consequences. Around 15% of Gen Z and millennial generations said they reduced contributions to their 401(k) and similar retirement plans over the last year. That could have significant implications for their long-term financial security.
Offering Financial Guidance Across All Generations
With prices likely to be higher for longer, financial professionals should take this opportunity to help clients across all generations stay calm and focused on their long-term goals while they consider the impact of inflation on their financial plans.