Divesting Inflation Demographics: Consumer Studies May Show It’s More Than Inflation Irking Investors

This doom-mongering may have geographic or political lines. Those demographics could help advisors understand why some clients are more worried about inflation than others…. In short, an advisor may need to dig into their clients’ demographics to determine the best approach to addressing inflation.

Inflation seems to be yesterday’s news, but the ghost of it is still haunting the paychecks of many investors. Way back in August of 2022, we tackled the upside of inflation, asking advisors to consider the potential positives. “[Think of how to position investments to benefit from inflation. Advisors and investors may want to consider if any of these potential upsides could help position their investments to achieve their retirement goals.”[1]

Such positivity may not be welcomed by all investors these days. Yet, there has been progress. First, the bad news. The consumer price index (CPI) actually increased in December of 2023 to 0.3% and a total of 3.4% from 2023.[2] However, most of this increase continues to be from rising housing costs which “accounted for more than half the core CPI increase.”[3] Oddly, when surveyed the overwhelming majority of Americans (72%) point to groceries and consumer goods as their highest cost concern.[4]

Even if inflation is somewhat predictable and more modest than in 2021 or 2022, it may remain on investor’s minds for one important reason: wages aren’t keeping up. “Wages adjusted for inflation posted a 0.2% gain on the month, while rising a modest 0.8% from a year ago.”[5] In other words, investors wages are effectively decreasing year over year by 3%. Obviously, in a short term crunch the battle over the household budget should favor basic expenses, and an emergency savings account, over long-term savings.

Yet there is a sunny side to these numbers. Some on the federal reserve may favor lowering interest rates sooner than investors may think. Federal Reserve Governor Michelle Bowman has made 2% the goal, noting that once inflation drops below that rate, she will consider interest rate cuts.[6] Overall, most of the experts agree that a rate cut may be coming in 2024, potentially spurring greater consumer behavior.

Inflation may be the rose by another name: it may be the years-long global instability that has investors losing confidence in their ability to achieve their retirement savings goals. You can see this sentiment in recent remarks from Bowman, who said she “remained vigilant about risks that could push inflation back upward - including geopolitics, a recent easing in financial conditions and labor market tightness that could keep services inflation too high.”[7] In November of 2023, we noted recent surveys showing strong drops in investor confidence. There we said that the majority of respondents “said they had lost confidence in both the amount needed to retire and the date on which they could retire…. even affluent investors said that inflation was crushing their retirement dreams.”

But there is more to it than just volatility concerns. If it was simply that, advisors would have a single-track approach for working with investors: address risk tolerance and risk capacity.[8] It’s clear the negative feelings of many investors stem from more than just volatility. There may be economic doom-mongering in unexpected places. U.S. Chamber of Commerce CEO Suzanne Clark has been urging news outlets to consider the positives of the economy and recruiting business leaders to extol them. “And if the business community isn't out there telling the real story — the American story — of opportunity and progress in this country, then no one should be surprised when people believe it's as bad as the headlines and the political ads say it is.”[9]

This doom-mongering may have geographic or political lines. Those demographics could help advisors understand why some clients are more worried about inflation than others. According to a Harris/Axios poll “Republicans, rural residents, renters, women and singles disproportionately feel like they're in a big fat funk financially….”[10] In short, an advisor may need to dig into their clients’ demographics to determine the best approach to addressing inflation.

[1] https://www.bcgbenefits.com/blog/inflations-improbable-benefits-for-investors

[2] https://www.cnbc.com/2024/01/11/cpi-inflation-report-december-2023-consumer-prices-rose-0point3percent-in-december-higher-than-expected-pushing-the-annual-rate-to-3point4percent.html

[3] https://www.cnbc.com/2024/01/11/cpi-inflation-report-december-2023-consumer-prices-rose-0point3percent-in-december-higher-than-expected-pushing-the-annual-rate-to-3point4percent.html

[4] https://www.axios.com/2024/01/11/americans-red-state-us-economy-axios-vibes

[5] https://www.cnbc.com/2024/01/11/cpi-inflation-report-december-2023-consumer-prices-rose-0point3percent-in-december-higher-than-expected-pushing-the-annual-rate-to-3point4percent.html

[6] https://www.reuters.com/markets/us/feds-bowman-says-policy-rate-appears-sufficiently-restrictive-2024-01-08

[7] https://www.reuters.com/markets/us/feds-bowman-says-policy-rate-appears-sufficiently-restrictive-2024-01-08

[8] https://www.bcgbenefits.com/blog/investor-uncertainty-in-critical-times

[9] https://www.axios.com/2024/01/11/us-chamber-of-commerce-capitalism

[10] https://www.axios.com/2024/01/11/americans-red-state-us-economy-axios-vibes  

These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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