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Will inflation persist?

Illustration of a man looking through binoculars at pie chart

Thrivent’s chief investment officer shares his fourth-quarter views.

In this space of the Fall 2020 issue of Thrivent Magazine, I wrote about the potential for significant inflation. At that time (for the 12 months ending August 31, 2020), inflation was 1.3%, as measured by the Consumer Price Index, an index that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. Many experts considered the risk for a substantial rise to be remote.

That same index measured inflation at 5.3% for the year ending August 31, 2021. Federal Reserve officials have stated that these inflation levels are likely to be “transitory” due to supply chain issues that will eventually be resolved. I have little doubt that some of this inflation is indeed short-term. A fair question, though, is what would more durable inflation look like, and how would one invest in such an environment?

We’ve all had experience with supply issues recently. Store shelves may be less full or lack certain items. Restaurant service may be slower than usual due to staffing shortages. I try to be extra kind to service workers these days, as they are clearly working harder than ever!

Inflation, it is important to remember, can show itself in ways beyond simply higher prices. Paying the same amount for less service or fewer goods also can be evidence of inflation. It is never a good idea to make investment decisions based on a single person’s experience. That’s why we look at lots of economic data. However, we also can’t ignore what we see with our own eyes. I’ll be watching carefully the next few months for these signs of inflation to abate.

If inflation persists, value and cyclical stocks would likely outperform. The big technology stocks could suffer. We continue to favor quality stocks with strong balance sheets and growing earnings. However, if inflation does appear to be more than transitory, we would likely shift even more into value areas such as financials, materials and manufacturers.

David Royal is chief investment officer at Thrivent.

The views expressed are as October 2021 and may change as market or other conditions change and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product.

Asset management services provided by Thrivent Asset Management, LLC, a registered investment adviser. Thrivent financial professionals are registered representatives of Thrivent Investment Management Inc., broker/dealer and registered investment advisor, member FINRA/SIPC. Both entities are subsidiaries of Thrivent, the marketing name for Thrivent Financial for Lutherans.