Though inflation has recently cooled a bit, it’s still just coming off a 40-year-high, and recession warnings and market volatility abound. And that means investors are understandably nervous. So we decided to chat with Chester Spatt, a professor of finance at Carnegie Mellon University’s Tepper School of Business since 1979.
Spatt served as chief economist and director of the SEC’s Office of Economic Analysis from 2004 to 2007, and as both a research associate of the National Bureau of Economic Research and a fellow of the TIAA-CREF Institute. He’s also published countless research papers examining market structure, trading, financial regulation, pricing and valuation and the impact of information in the marketplace. Here are his thoughts on what investors should know during these high times of inflation:
A recession is likely.
Inflation is currently sitting at 7.1%. And as Spratt points out, that means purchasing power is declining rapidly. “There are monetary policies to address the high inflation that entail much higher interest rates and a slowdown of the economy,” says Spratt. (Indeed, the government is trying to address inflation by raising rates — they’ve increased them by three quarters of a point four times this year — which is something that hasn’t happened in almost 20 years.) “This will likely lead to a recession,” says Spatt.
Inflation may be persistent.
“Lots of people were saving a lot of money and now people are starting to spend it and they’re spending in a big way. This has led to a lot of demand for goods. During COVID, people were discouraged from working or had complications with working and you had supply shocks that shut down plants and factories. The Fed only has one tool to reduce demand and that’s what they’re trying to do [with inflation], but it’s going to be a long slog,” says Spatt.
Keep investing in equities.
Spratt says he believes in long-term investing and buy and hold, as well as index funds. “If inflation continues to be high, you’re not going to earn high returns, so you’re better off investing and holding equity because as long as inflation is anticipated, equity values go up,” says Spatt.
“Typically, fixed-income investments are more vulnerable to inflation. One investment that is favorably priced in an inflationary era are inflation-protected savings bonds (I-bonds) because the bonds have a real return of at least zero,” says Spatt.
Series I savings bonds earn both a fixed rate of interest and a rate that changes with inflation. The current composite rate for I-bonds issued between November 2022 and April 2023 is 6.89%, and because the composite rate increases with inflation, I-Bonds protect you from inflation. Given this level of protection, there’s been record demand for I-bonds and they’re not always easy to purchase. They’re available electronically from the TreasuryDirect website or they can be purchased on paper via your federal tax refund. You can read more about I-bonds in Beth Pinkser’s column here.
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