High Inflation May Continue: How It Could Affect Your Investing

The views presented here do not necessarily represent those of Advisor Perspectives.

The two largest threats to financial security are market plunges and inflation. Unfortunately, both could occur simultaneously, possibly in a stagflation scenario. The April Consumer Price Index (CPI) came in at 0.6% over March and 3.8% over the prior year. Even stripping out food and energy, prices rose 0.4% and 2.8% respectively.

If that weren’t bad enough, the Producer Price Index (PPI) rose 1.4% over the prior month and 6.0% over the past year. The producer price index is perhaps even more important, as it’s indicative of the future CPI. Finally, the Personal Consumption Expenditures index rose 3.8% in April, up from 3.5% in March. All of these numbers are well above the Federal Reserve’s 2.0% annual target.

In this moment, there are so many questions for which we would like answers. Will inflation continue or quickly decline when the Strait of Hormuz is opened? What will be the impact of the continuing deficit spending and the national debt approaching $40 trillion? Will it cause double-digit inflation as the U.S. dollar loses its status as the world’s reserve currency? Will the U.S. suddenly become fiscally responsible?

Balancing Budgets Comes With a Different Kind of Cost

In my view, any politician running on a balanced budget platform would be campaigning with “Vote for me and I’ll raise your taxes and cut your benefits.” I’m no political expert, but that’s not a winning platform — if I was the candidate, I wouldn’t even vote for me.

And speaking of politics, will the Federal Reserve Board maintain its independence to fight inflation? Many speculate that the new Fed Chair, Kevin Warsh, wants to lower rates and could be beholden to the President, who has been pressuring the Board for lower rates. Bond markets appear concerned, as the 30-year Treasury bond recently hit an 18-year high.

The devastation high inflation can inflict on consumers was perhaps best described by the famed economist John Maynard Keynes who said:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

The reason inflation is a hidden tax is that taxes are based on nominal returns. If we assume nominal yield = real return + expected inflation, the following is what happens after taxes, using a 2% real return and a 40% marginal tax rate (federal and state).

If inflation is 2% and one makes 4% on a bond, then one sees a positive real return of about 0.4% after taxes, at a 40% marginal rate (Federal and state). But if inflation is 10% and one makes 12% on a bond (same real 2% return), then one actually loses about 2.8% of their spending power after paying taxes. I’m old enough to remember how much of my spending power was eroded after taxes when my bonds were earning double-digit nominal returns in 1980.

Investing During These Uncertain Inflationary Times – What Not to Do

Before I recommend what to do, I want to first state what not to do. Don’t invest as if you think you know what long-term inflation will be. Will we return to the double-digit inflation of the late ‘70s and early ‘80s? The answer is: Nobody knows.

According to research by the Peterson Institute for International Economics, neither economists nor the bond market has a good track record of predicting inflation. I merely think we are in unchartered territory with our debt and deficit, and that increases the risk of high inflation.

In my opinion, another thing not to do is buy gold or bitcoin. Marc Fandetti, CFA researched the subject of gold and inflation and concluded on the CFA institute web site, “An inflation hedge should respond positively to inflation. On average, gold doesn’t.”

I bought gold in 1980 when inflation was soaring. Though it has kept up with inflation, my $6,684 in gold would have made an additional $1.2 million had I invested in Jack Bogle’s S&P 500 index fund. Bitcoin and other cryptocurrencies are just too risky and untested. Both gold and crypto are fine for one’s “fun gambling” portfolio, which typically should be less than 5% of the client’s risky assets.

Finally, cash might be thought of as a safe haven, but spending power will almost certainly get crushed over time, as after-tax returns are unlikely to keep pace with inflation.

My Advice

I’m telling clients not to be so sure that inflation will surge. Japan, which has the highest debt-to-GDP ratio of any developed country, has been running deficits and fighting deflation. While Japan has an aging population, the U.S. does as well. Although I fear high inflation, anything can happen. I’m recommending the following regarding stocks and bonds:

First, have a fixed income allocation that includes Treasury Inflation Protected Securities (TIPS). I prefer owning the bonds themselves rather than TIPS funds. As of May 26, 2026, a 30-year TIPS ladder yields 2.55% above inflation, according to Tipsladder.com. Holding the bonds until maturity guarantees one will best inflation before taxes.

As mentioned earlier, taxes are based on nominal returns, so high inflation can cause a lower after-tax real return. While there are pros and cons on whether to hold TIPS in taxable or tax-deferred accounts, holding in a tax-deferred account gives better protection against inflation.

High inflation yields the same real return as low inflation within tax-deferred accounts. Only a change in tax rates would change the real spending power and, of course, that would occur for just about every investment outside of a Roth tax wrapper.

Aim Shorter With Bonds

Next, don’t go long on nominal bonds. Higher inflation will almost certainly lead to higher intermediate- and long-term rates. The longer the duration, the greater the bond or bond fund’s probability of getting hammered by high inflation. The iShares 20+ Year Treasury Bond ETF (TLT) lost a staggering 31.2% in 2022 when rates rose. That’s just too much risk.

Although the current yield curve is no longer inverted, it’s not steep either. A combination of short- to intermediate-term bonds is what I’m recommending for nominal bonds. All bonds should be high credit quality. I’ve never been a fan of junk bonds (below BBB grade) as they could be hit especially hard by inflation due to weaker balance sheets and cash flow prospects.

Stocks are perhaps the best long-term protection against high inflation, though they could get hit badly in the short-run. Tech stocks typically get hit harder since they are growth stocks, and the duration of the cash flows is longer. That’s not to say I’m recommending avoiding tech, but I am recommending against overweighting the tech sector.

Even an S&P 500 fund overweights tech versus the entire market, so I recommend a total U.S. stock index fund, along with a healthy dose of international stocks. International has less tech and is more of a value play, with shorter durations for expected cash flows.

Conclusion

I advise my clients to “get real.” This means to think in real, inflation-adjusted, terms. Being a billionaire isn’t good if it takes $100,000 to buy a loaf of bread. Inflation is scary, and we really don’t know if the recent surge is a short-term blip or the beginning of even higher long-term inflation.

We all are obviously feeling the pain, especially at the gas pump. Everyone should be prepared for the possibility of long-term high inflation. While I wouldn’t go overboard, TIPS provide the greatest certainty of besting this unknowable future inflation rate.