Honey, I’m home: Inflation makes its comeback

If you’ve been to a gas pump lately or paid your heating bill, you have a pretty good sense that energy costs more today than it did a year ago. A trip to the grocery story will add to your growing store of anecdotal evidence that prices are rising appreciably. Recently the statistics confirmed your worries: the inflation rate has increased to 4.7% for the last year, a big jump from the 2% annual rates we have enjoyed for several years.

The culprits have been the prices of food and energy. Economists say there has been little increase in the so-called “core” rate of inflation—which excludes food and energy because they are volatile and subject to temporary supply shocks. But that rate means little to the rest of us: We have to eat regularly, heat our homes, and gas up our cars.

We don’t know if this is just a blip on the price screen or the beginning of a sustained period of higher prices. If it is, then we are entering a period that will sorely test our portfolios. Inflation is the real enemy of financial assets because it is virtually permanent—the last time consumer prices fell on a calendar year basis was 1954. Stock market declines are temporary: months or years later stocks recover and move higher.

Inflation makes it all the more important to invest in financial assets that grow, rather than stable assets that merely collect interest. Some bank customers may be getting excited about higher yields after years of paltry interest payments. The average one-year certificate of deposit yielded 3.81% and the highest yield offered at one bank was 4.51% in late October, according to Bankrate.com. This isn’t very enticing, given an inflation rate of 4.7%. The CD customer would see his dollar shrink after paying taxes on interest.

The only proven ways to beat inflation and obtain real growth on a portfolio are investing in a business—either directly or through stocks—or in real estate.