- As data points to continued high inflation, Federal Reserve officials and other experts are worried about how long it could last.
- Top financial advisory firms from CNBC's FA 100 list say they have built strategies anticipating these conditions could last.
- The approach involves managing emotions as much as it does adjusting portfolios.
One looming question for the U.S. economy is how long inflation is here to stay.
Based on recent government data, there is good reason for asking.
The Consumer Price Index, which measures the average change over time of prices paid by urban consumers, had a year-over-year gain of 5.4% in September, the fastest pace in decades.
Meanwhile, the Federal Reserve's preferred measure of inflation, the core personal consumption expenditures price index, climbed to a 30-year high in August, when it was up 3.6% over the previous year.
Officials at the Fed are taking notice, based on recently released minutes from a September meeting, where some said it could last longer than they had assumed.
They're not the only ones who are worried. More than 7 out of 10 of retirement age investors — 71% — said they believe rising inflation will negatively affect their retirement savings, according to a recent survey from Global Atlantic Financial Group.
"The big argument right now is how much inflation are we going to get and how permanent will it be," said James Angel, associate professor of finance at Georgetown University's McDonough School of Business.
Signs of cost push inflation, which is marked by increases in production costs, are cropping up now, just as they did in the 1970s, Angel said.
On top of that, there has been both monetary and fiscal stimulus heaped on the economy. That in itself is going to be inflationary, Angel said.
"We need to buckle up our seat belts," Angel said. "Inflation is here. It's real."
Financial advisors who landed on this year's CNBC Financial Advisor 100 list say inflation is a top issue in their work with clients. For many of those clients, it is as much emotional as it is financial.
"A lot of our clients came of age in the '70s, the last time we saw big-time inflation take hold," said Andy Pratt, partner and director of investment strategy at The Burney Company, which is No. 38 on the 2021 FA 100 list.
The firm, which is based in Reston, Virginia, typically focuses on clients with $1 million to $2 million in investable assets.
Their clients remember prices skyrocketing, long gas lines and not being able to afford things, Pratt said. The perks of high inflation, like higher wages, are not as top of mind, Pratt said.
To help address their emotions, the firm has reminded clients that this is not necessarily a repeat of the inflation they remember, and that it can happen for various reasons.
It also has been coming up with strategic asset allocations to help them stomach inflation, Pratt said.
While that includes some exposure to bonds, the firm is cautious about over-allocating to that asset class. At the same time, they have been leaning towards value stocks over growth stocks.
Meritage Portfolio Management, a boutique portfolio management company that is ranked No. 60 on this year's FA 100 list, also has clients, particularly baby boomers, regularly ask about what the surge in inflation means.
Mark Eveans, president and chief investment officer at the Overland Park, Kansas-based firm, said stagflation, which is marked by high inflation and high unemployment, is one of his top concerns.
The big risk for investors in such an environment is that it would be very difficult to achieve real growth, rather than nominal growth, Eveans said. The '60s to early '80s were a perfect example of that, he said.
"That was not a good time for investors, because they lost real money during that time," Eveans said.
To address that risk, Meritage has taken the position that inflation is less transitory than some experts have projected.
It is also adjusting the strategies for its portfolios, which it typically builds stock by stock and bond by bond. The firm has increased its exposure to value equities versus growth equities in the past nine months, which Eveans calls an "at the margin change," rather than a sea change.
In addition, the firm has also turned up allocations to areas including energy, materials and financials, and reduced client exposure to other sectors like consumer staples.
On the fixed income side, Meritage is focusing on safety for both income and principal, said John Wallis, director of fixed income.
That includes a laddered approach to the maturities in the portfolio, as well as a preference for corporate bonds over Treasurys, he said. The firm is also adding treasury-inflation protected securities where it can.
Much of how the story with inflation unfolds will come down to the Federal Reserve, Wallis said.
If the Fed falls behind, inflation could become embedded in the financial system, which would require the central bank to take more aggressive action later on, he said.
"That probably is what I would be most concerned about and would probably surprise investors," Wallis said.