There hasn’t been a more important macroeconomic topic in the past few years than that of inflation. Due to a combination of factors, like supply chain bottlenecks, monetary stimulus, and pent-up consumer demand, prices across the economy rose to decade-high levels in 2022.
However, thanks to higher interest rates, the Federal Reserve has brought inflation under control. That isn’t to say we’re in the clear yet. The widely followed Consumer Price Index (CPI) saw accelerating year-over-year increases in the last three months of 2024. Investors should be paying attention.
To be clear, you can’t control inflation. But you can do something about it to better position your portfolios for long-term success.
The effective federal funds rate was at 4.48% in December. That’s significantly higher than the less than 0.1% it was during the nearly two-year stretch following the onset of the COVID-19 pandemic. To combat inflation, the central bank quickly increased the federal funds rate to pressure borrowing and spending activity. But December’s CPI print of 2.9% is still 45% higher than the Fed’s 2% target.
It’s difficult to believe that inflation will come down anytime soon. President Donald Trump’s notable economic policy views favor higher prices across the economy. Tax cuts can increase demand for goods, as they raise the spending power of citizens. And implementing tariffs can also increase the price of goods that are imported because these higher costs could be passed onto consumers.
And when speaking at the recent World Economic Forum, Trump said, “I’ll demand that interest rates drop immediately.” If put in motion, lower rates can boost inflation.
Of course, the Federal Reserve aims to be independent of the White House. But there’s still a chance inflation is higher over the next few years than it’s been for most of the past decade.
For long-term investors who care about picking individual stocks for their portfolios, trying to predict macroeconomic trends is not the best use of time. But I believe every investor should at least be aware of what’s happening within the broader economy.
At the end of the day, it’s all about finding the right companies that can excel when prices are going up. “The single most important decision in evaluating a business is pricing power,” the legendary Warren Buffett once said. These companies have not only figured out how to deliver excess value to consumers, but to capture a larger chunk of that value for themselves. There might be no better setup out there.
