Upbeat music plays throughout.
Narrator: In 2024, inflation in the U.S. fell to more normal levels after recent highs in 2022.
Animation: Chart showing 12-month percent change of Consumer Price Index 2015 – 2025.
Narrator: But by early 2025, many investors had renewed concerns about inflation in the face of potential trade wars, government policies on immigration, and tax changes.
On-screen text: News headlines "US Consumer Inflation Expectations Spike to 30-Year High" "TIPS Funds Gain on Fears of Inflation and Economic Downturn, Inflation-protected bond funds are delivering for investors in 2025." "Investors fear inflation is coming back. They may be right, Is the world about to repeat the mistakes of the 1970s?"
Narrator: You may be wondering: If inflation is back, how might it impact my investments? In short, inflation is the rise in cost of goods and services. Basically, it's how much value your money loses over time.
But that doesn't mean inflation is bad. Some inflation is good. People don't like it when prices go up, but it is normal and, in fact, helpful for an economy. That's because some inflation incentivizes people to spend now rather than holding onto their cash. That drives economic activity and creates value.
In fact, too little inflation, known as disinflation, can be a sign of a struggling economy. So can falling inflation, called deflation. But too much inflation too quickly, called hyperinflation, can lead to economic instability and market crashes.
So, what causes inflation? Well, it's got a few influences, but the primary cause is an imbalance between supply and demand. If demand for goods, services, or labor is higher than the supply, prices rise.
That means breakdowns in supply chains, for example, can affect not just prices but entire industries. Similarly, rising oil prices can lead gas companies to charge higher prices to consumers at the pump to offset their increased costs. That's inflation.
Ok, so… some inflation—good. Too much or too little inflation—not so good. Now, how is inflation measured? There are a few different indexes that track inflation in the U.S. One is the Consumer Price Index, or CPI. This is a measure of the average change in prices paid by consumers for goods and services. The annual change in CPI was 2.9% in 2024, down significantly from its high of 9.1% two years prior.
Animation: Chart showing 12-month percent change of the Consumer Price Index 2020 – 2025.
Narrator: Another measure for inflation is the PCE, or the Personal Consumption Expenditures price index. This is considered the Federal Reserve's preferred inflation measure. In February 2025, the annual PCE was 2.5%—that's down significantly from its June 2022 high of 7.1% year over year.
Animation: Chart showing 12-month percent change of the Personal Consumption Expenditures price index from 2020 – 2025.
Narrator: Now that we've broken down what inflation is, let's get into some steps you might want to take if you're concerned about it.
First, remember that historically speaking, stocks have tended to outpace inflation over the long run. From 1926 to 2024, inflation has averaged 2.9% a year while stocks have returned an average of 10.4%. This is well above bonds and cash. Of course, past performance is no guarantee of future performance.
Animation: Chart showing inflation vs. asset class returns 1926 – 2024, with stocks averaging 10.4%, bonds between 4 and 5%, and cash just over 3%, all outpacing inflation at 2.9%.
Narrator: So, consider the type of stocks you're buying and why. Are you investing in a company because it has high expectations for growth? Or does it seem undervalued? There's a time and a place for both, but in times of high inflation, or even hyperinflation, it could be smarter to invest in stocks that appear underpriced—which is known as value investing. Hyperinflation—which, again, is when prices go up too quickly—can hurt growth companies, which tend to rely more heavily on debt. Meanwhile, value companies are less likely to borrow to produce future earnings. Hyperinflation can make new debt more expensive.
When it comes to choosing stocks during inflationary periods, there are a few things you could consider looking for. A strong profit margin will tell you how much profit a company makes after accounting for costs. A high free cash flow yield will tell you how much cash a company has available after accounting for its costs and debt. A higher yield is generally a sign of financial health. Consider looking for forward earnings revisions. This captures what companies are reporting in terms of their earnings expectations for the coming months. One other thing that makes sense is looking for companies with low volatility. Some stocks' price swings are wilder than others.
Also, you can consider investments that adjust the return depending on changes in inflation. TIPS, or Treasury Inflation-Protected Securities, are a type of Treasury bond with a value that increases (or decreases) depending on changes in CPI. In other words, if CPI rises, the value of the principal invested in TIPS and future interest payments will rise as well. When TIPS mature, an investor is paid the adjusted principal or its original principal when it was issued—whichever is greater. Of course, TIPS are subject to certain risks. They tend to have lower yields than other treasuries, their value will decline if interest rates rise, and principal adjustments can be taxed before the bond is sold or redeemed.
Whether you're concerned about inflation or believe the Fed will be able to keep it under control, it's important to monitor inflation and take steps to help protect the purchasing power of your money.
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