In April 2021, U.S. consumer prices jumped, reflecting both the post-pandemic economic recovery and the emergence of supply bottlenecks. The U.S. Department of Labor reported that its consumer-price index increased by 4.2% from a year before, marking the highest 12-month level since the summer of 2008. The prices of all types of commodities have been steadily increasing since last year. The chart below depicts the one-year performance of copper, crude oil, corn, wheat, and soybeans.

Market Reaction

Upon the release of the news about rising inflation, interest rates jumped while stock prices fell, with technology stock prices falling the sharpest. Investors fear the Federal Reserve (Fed) will start raising interest rates to combat inflation sooner than previously expected. Technology shares are thought to be especially sensitive to rising interest rates because they had previously been the benefactor of the Fed’s liquidity.

What it Means for Your Portfolio

We prepared your portfolio ahead of inflation with three changes we made over the last year:

1. We added the iShares Russell 2000 Value ETF (ticker: IWN) to portfolios. IWN holds twice as much value in the materials and energy sectors than it does in the technology sector.
2. Avid readers of this blog will remember that we added Treasury Inflation-Protected Securities (TIPS) to the portfolio last year. TIPS are not exposed to the risk of inflation, as their principal and interest are adjusted higher for inflation. We previously discussed inflation and TIPS in this February 2021 blog post.
3. We reduced the amount of fixed income in your portfolio by 5% earlier this year. These funds were then put into defined outcome ETFs. The defined outcome ETFs are expected to provide the return based on the S&P 500, except both the upside and downside are capped.

As always, we will continue to monitor the changing inflation rate and how it may affect your portfolio and overall financial plan.