The Independent Market Observer

Don’t Miss the Green: Inflation and Your Portfolio

Posted by Rob Swanke

This entry was posted on Aug 13, 2019 2:43:13 PM

and tagged Commentary

Leave a comment

inflationBrad here. Today's look at inflation and your portfolio is brought to you by Rob Swanke, a fixed income analyst on our Investment Management and Research team. Take it away, Rob.

I love golf—it’s a great game of risk and reward. You choose the risk you take on each hole, whether you want to go for the green or take the safe route. But, sometimes, there’s a pond right in front of you and your focus turns to avoiding it. The result? You forget to see the rest of the hole. You play it safe and avoid the water only to get stuck behind a tree, not able to reach the green.

In today’s market, many people understand the risk of recession, especially after more than 10 years of growth. Indeed, a recession is one of the biggest risks to your portfolio. But there’s also the risk that inflation will devalue your portfolio if it’s built around the recession risk. Typically during a recession, high-quality, long-duration fixed income will have the best performance. In an inflationary environment, however, those same assets will perform quite poorly. Consequently, it’s important to not only think about the value of your portfolio but also to think about what the purchasing power of that portfolio is now and what it will be throughout your investment horizon.

Where has inflation been?

Since the recession, we’ve seen inflation greater than 2 percent only for brief periods. So, why should we be concerned? To answer this question, we need to assess why inflation has been low, as well as the factors that could generate higher inflation going forward.

Labor force participation. During the recession, many people left the workforce and were no longer counted as unemployed in the headline unemployment number. So, although headline unemployment has dropped significantly since the recession, many people were left on the sidelines, ready to work again once jobs became available. This scenario kept wages down and is reflected in the large increase in the participation rate among prime-age people (i.e., those who are 25–54 years) reentering the workforce as the economy recovered.


Still, we have not reached the level of prime-age participation that we saw prior to the crisis. In fact, there may be people who continue to wait on the sidelines.

The price of goods. It’s also important to keep in mind that the recession was a global event. Although the U.S. has mostly recovered, many other areas of the world haven’t caught up. Since other countries’ wages have remained low due to high unemployment, the prices of goods that are exported to the U.S. have remained low, helping keep a lid on prices in the U.S.

Another anchor to prices has been technological developments, including the Amazon effect. These days, consumers can find the lowest price from a variety of manufacturers at the push of a button. As a result, it is hard for one producer to raise prices when it’s very easy for consumers to make the switch to a lower-cost product.

Consumer expectations. Finally, inflation expectations have dropped among consumers. This drop can lead to low inflation as people are reticent to pay increased prices when they expect them to remain low.

Could inflation return?

As we move further from the recession, many of these factors could reverse and new factors could come into play. Not only are we nearing pre-recession prime-age participation rates, but many boomers will also be entering retirement. These shifts will reduce the overall workforce and put pressure on rising wages. These same boomers will be looking to spend the assets they’ve built up. In many cases, those entering retirement will find that many of the greatest expenses are service related, such as health care, leisure activities, and the cost of eating out. As wages rise, the cost of those services may also rise. You can see in the chart below how services inflation has outpaced goods inflation over the past 10 years.


Another factor that could cause inflation to rise is the Fed’s determination to ensure that we don’t enter a deflationary environment where people have an incentive to stop spending. The Fed cut rates at its latest meeting to show its commitment to boosting inflation while many other economic indicators remained strong. The Fed has also been discussing its willingness to let inflation run hotter to make up for consistently low inflation. At the same time, it has indicated that policy may be less effective in holding down inflation in the future.

Don’t miss the green!

Although a recession will inevitably come at some point, don’t just plan to avoid the water. Rather, set up your next shot to reach your end goal. Including high-quality fixed income in your portfolio is important in the event of a recession—but ignoring the risk of inflation will have you missing the green.

Subscribe via Email

Crash-Test Investing
New call-to-action

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®