The most recent data indicates an annual U. S. inflation rate in excess of 8%. While the Federal Reserve continues to address this problem, we must also deal with inflation’s impact on our personal savings and assets.
During the third quarter the Fed raised interest rates by .75% once again. This is the third consecutive ¾ point rise, indicating the Fed’s determination to bring inflation under control. The yield on the 10-year U. S. Treasury bond rose to 4% while mortgage rates reached 7%. Stocks continued to react negatively (the S & P 500 Stock Index is down 24% through the third quarter) as investors have feared the rise in interest rates will move the economy into recession.
While the Fed does its work, we try to protect assets and purchasing power from the long-term effects of inflation. It is always difficult to watch portfolio values decline as analysts assess the impact of recession on corporate earnings. However, investment in well managed businesses, providing essential goods and services, has proven to be an effective hedge against inflation over time. Current economic trends will impact earnings over the short term; however managements are able to adjust inventories, costs, and pricing to meet the changing economic conditions.
On the positive side, rising interest rates are yielding reasonable returns on fixed income investments, providing additional income to portfolios.
We will remain patient investors looking for opportunity during this period of economic uncertainty.