Inflation is still high… and it doesn’t really matter.

Now, before you think I have my head in the sand, let me explain.

[Thursday] morning, the Consumer Price Index came in at 0.4% month over month and 3.7% year over year, both slightly higher than expected. This follows an also slightly hotter than expected Producer Price Index report on Wednesday. And the second month of overhot readings in a row.

Higher oil prices are mostly to blame for this one, as fuel costs trickle through everything in the economy.

But in general, why is inflation taking so long to slow down?

Frankly, there’s just a LOT more money sloshing around in the system than there was a few years ago.

To be exact, it’s about $5.5 trillion more, or an increase of about 35% from February 2020. This chart of the M2 Money Supply — an estimate of all the readily available dollars in the economy — shows it:

Source: Federal Reserve of St. Louis

The Federal Reserve has been working to wean this off and get inflation under control. M2 is down by just over $1 trillion since the peak in early 2022.

But the shock of the pandemic, and the much higher amount of money still in the system, means we’re likely to face “high inflation” for a while. Should the Fed remain fixed to its 2% target, we can be almost certain of it.

There’s not much we can do about this as consumers. Prices will be what they will be.

So a much more useful question to answer is what we should do as investors…

Just Keep Buying
If you wanted a more complex answer than “just keep buying stocks,” I’m sorry to disappoint you.

But regardless of whether we’re in times of high inflation or low inflation, bull markets or bear markets, war or peace or anything in between… you simply can’t go wrong with “just keep buying.”

Skeptical? All we need to confirm that is a long-term comparison of inflation and stock prices.

According to Bureau of Labor Statistics data, the average annual rise in the Consumer Price Index for the last 100 years is… drumroll… 3%.

Yes, that’s a full 50% higher than the Federal Reserve’s apparently unrealistic goal of 2%. Here’s what it looks like over time.

Source: Bureau of Labor Statistics

With that in mind… inflation’s actually not all that “high” relative to its long-term average. It’s about 23% higher than usual.

Well, high or not, inflation is bad for the guy trying to save all his money by stuffing his pillowcases with green paper.

But you’re probably not that guy… You’re an investor. And because you have money invested in the market, you’re almost always a step ahead of inflation.

Just look at the long-term annual returns of the S&P 500 for comfort. That’s been 10.5% on average, more than 3 times the rate of inflation, since 1923.

If you took $100 and bought the S&P 500 every month and reinvested all dividends, your return would be over $2 million.

Source: OfficialData.org

Meanwhile your weird pillowcase friend, who’s been diligently putting $100 into his pillowcase every month for 100 years, has saved just $120,000 and lost a whole lot of purchasing power.

That market return is through depressions and recessions… two World Wars…and even periods where inflation did outpace the rate of stock market gains.

In the end, none of that mattered. Consistently investing your money mitigated nearly all of the threat of inflation in the long run.

This might sound obvious to someone who’s been investing for a long time, but I’m sharing this for a good reason…

Don’t Get Caught In The Chop
There’s been a lot of handwringing about inflation these days. When the CPI numbers came out Thursday, stocks dropped like a stone right after the open.

The fear is that the Federal Reserve will keep rates higher for longer, and maybe even raise them again at the end of November, because of this data.

If you get concerned about things like that, I get it. Nobody wants to open their brokerage account and see red, especially after it’s been nonstop chop for the past couple months.

Nonetheless, I encourage you to take the long view…

Over the long arc of market history, assets rise in value faster than inflation. That’s just a fact. And while there’s no guarantee that’ll continue to be the case for the next 100 years, the odds are heavily stacked in your favor.

And if we see poor or even negative returns in stocks for the next several years, there are plenty of ways to make up for that. Taking advantage of higher interest rates and capturing yields on risk-free Treasuries is just one such way.

My point to all of this is to talk any potential worried investors off the ledge. We should not fret about the things we can’t control — inflation data — and instead focus on the things we can — our investment strategy. If we do that, the lower prices we’re seeing today start to look more like a blessing than a curse.

I, personally, just added quite a sum to all my favorite long-term stock holdings. It made me feel a LOT better about the last couple months.

Try doing something similar and see how you feel.

— Keith Kaplan

Source: TradeSmith