Question: Is inflation coming back?
Answer: Until recently, only the cost of services had been rising, but the cost of goods now appear to be following suit. Prices for everything from DRAM chips to copper, lumber, oil, grains and other goods are rising.
Question: What does rising inflation mean for your bond portfolio?
Rising inflation should continue to exert upward pressure on interest rates. The benchmark 10/year treasury yield is now at 1.07% up from 0.55% a few months ago. Inflation and rising rates are the nemesis for many bond portfolios, excepting ones with very short maturities or durations.
Question: What does rising inflation mean for your equity portfolio?
Early signs of inflation can actually be a tailwind to stocks. Stocks can tolerate mild inflation. Companies can charge more for goods and services and to the extent to which they are able to maintain their respective profit margins, can maintain a certain level profitability.
Inflation incentivized consumers to buy now before prices rises as opposed to deflation which brings about an attitude of “Why buy now, prices will be lower tomorrow.”
However, the worse inflation gets and the higher interest rates rise, the headwind to earnings becomes much worse.
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