IS INFLATION ON THE HORIZON?

Recent reports show that inflation has ticked up to some of the highest levels we’ve seen in a long time. While there is no call for panic, this is definitely something to keep an eye on.

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It has been decades since the United States has seen significant inflation. Many adults, including investing professionals on my team, have never experienced this, and that might make us more vulnerable.

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Inflation erodes the value of savings and decreases confidence in the future. The business world relies on having some reasonable predictability in future cash flows, and investments become a lot more challenging when the value of those cash flows is uncertain.

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Another danger is that inflation can quickly become a self-fulfilling prophecy, where the mere expectation of higher prices in the future becomes an engine that drives further inflation. This kind of feedback loop has me concerned that policy-makers are overestimating their ability to control the situation.

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Over the past year or so, the government has increased the supply of dollars in circulation by something like 40%. At the same time, a year of pandemic has left households with a lot of pent up demand. That means there are a lot of dollars competing to buy goods, services, and assets.

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Even if future spending returns to normal, price increases tend to be sticky for many consumer goods. It’s very hard for businesses to lower their prices, and even harder to lower salaries for employees who expect pay to only go up over time. Once prices go up, they almost always stay up, and that means today’s inflation is already getting baked into everybody’s expectations about the future.

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Alliance is prepared to succeed in any market conditions. We have a great portfolio and deep expertise in a niche market. We know how to identify great deals and add value, and that means we can always find ways to succeed.

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I’ll be keeping a very close eye on inflation so that Alliance is ready to take advantage of new opportunities as they arise.

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Frequently Asked Questions (FAQs) 

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 What does the current inflation outlook mean for investors?

The current inflation outlook suggests that rising inflation rates could create both challenges and opportunities for investors. Inflation in the US often introduces uncertainty around future cash flows, making experience, discipline, and a long-term perspective especially important when navigating inflation risks.

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How does inflation impact savings and long-term financial planning?

The impact of inflation on savings is gradual but meaningful, as higher prices reduce purchasing power over time. Long-term inflation effects can make it harder to rely on cash alone, which is why thoughtful planning and an understanding of how inflation affects real assets can help preserve financial confidence.

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Why are inflation expectations such an important factor to watch?

Inflation expectations matter because they can influence real economic behavior. When businesses and consumers expect prices to rise, those expectations can drive further price increases, increasing inflation risks. Monitoring these trends helps experienced market participants remain adaptable in changing conditions.

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How can investors prepare for rising inflation rates without overreacting?

Preparing for rising inflation rates often involves focusing on fundamentals, understanding inflation and investments, and maintaining flexibility. Investors who prioritize asset quality and long-term value creation are often better positioned to navigate inflation while staying grounded in disciplined decision-making.