Inflation in Your Portfolio

By Crescent Team

INFLATION: WHERE WE STAND TODAY

• In 2021, inflation measured by Headline CPI, rose 7.1 percent year-over-year. That is the largest annual gain in nearly 40 years. Recent headline figures were materially impacted by energy. Broad energy prices were up 29.3 percent, propelled by motor fuel prices rising approximately 50 percent in 2021.

• At their latest December meeting, the Federal Reserve once again acknowledged elevated inflation levels and initiated a reduction in the levels of its net asset purchases by $20 billion for Treasury securities and $10 billion for mortgage-backed securities. In January 2022 and beyond, further reductions in or even the elimination of Quantitative Easing (QE) policies are more likely as well as increase the Federal Funds rate from its 0 – ¼ range.

CPI REACHING LEVELS NOT SEEN SINCE THE 1980s

SHORT TERM VIEW

• A new, elevated base effect will begin to constrain year-over-year inflation growth.

• Coronavirus variants have elongated the supply chain disruptions, but they will eventually recover.

• Pent-up consumer demand from the economic reopening will dissipate.

• Energy related gains less likely to persist at the same pace seen in 2021

• Anomalies such as the material increase in prices of used cars is likely unique to period in time and COVID related.

LONG TERM VIEW

• Unprecedented levels of stimulus are underappreciated – long-term inflation will be driven by money supply.

• Higher wages can push up the cost of goods when businesses pass through cost and consumers have the ability to pay more for them.

• The pandemic will inhibit globalization, leading to the U.S. producing more goods domestically at a higher cost.

• Tight raw material inventories will continue to place upward pressure on inflation.

Glossary

• M2 Money Supply – M2 is a money supply measurement that includes cash, checking deposits, and other assets that can be quickly converted to cash. M2 is a closely monitored indicator for future inflation.

• Velocity – The velocity of money measures the rate at which money is used to purchase goods and services in an economy. High money velocity is typically associated with economic expansion, while low velocity is often associated with contractions.

• Unemployment Rate – The unemployment rate measures the proportion of the labor force that is not currently employed. It includes only those individuals who are looking for, but unable to obtain, employment.

• Personal Savings Rate – The personal savings rate measures the amount of money that is saved, rather than consumed. It is the ratio of personal savings to disposable personal income.

• Consumer Price Index (CPI) – The Consumer Price Index measures a weighted average of the prices of a basket of consumer goods and services, and the changes in these prices that consumers pay, over time. This is the most widely utilized measure of inflation.

• Personal Consumption Expenditure Index (PCE) – The Personal Consumption Expenditure Index measures the prices of household expenditures over a defined period. This is the preferred method by the Federal Reserve to measure inflation. The PCE differs from the CPI in that data is acquired through businesses as opposed to consumers, which is viewed as being more reliable. In addition, the formula allows for substitutions given changes in consumer behavior, which are not made in the Consumer Price Index.

• Breakeven Inflation Rate - The breakeven inflation rate measures expected inflation and is derived from taking the difference in yields between nominal, constant maturity, Treasury securities and similar duration inflation-indexed, constant maturity, Treasury securities.

For more information, please contact any of the professionals at Crescent Wealth Advisory.

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Disclosures and Definitions

All material and information is intended for Crescent Wealth Advisory business only. Any use or public dissemination outside firm business is prohibited. Information is obtained from a variety of sources which are believed though not guaranteed to be accurate. Any forecast represents future expectations and actual returns, volatilities and correlations will differ from forecasts. Past performance does not indicate future performance. This presentation does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.

When referencing asset class returns or statistics, the following indices are used to represent those asset classes, unless otherwise notes. Each index is unmanaged, and investors can not actually invest directly into an index:

TIPS:  Bloomberg Barclays Global Inflation-Linked: U.S. TIPS Total Return Index Unhedged

Municipals 5-Year:  Bloomberg Barclays Municipal Bond 5 Year (4-6) Total Return Index Unhedged USD

Core Bond:  Bloomberg Barclays US Agg Total Return Value Unhedged USD

High Yield Municipals:  Bloomberg Barclays Muni High Yield Total Return Index Value Unhedged USD

High Yield:  Bloomberg Barclays US Corporate High Yield Total Return Index Value Unhedged USD

U.S. Long Duration: Bloomberg US Aggregate Government & Credit - Long

Foreign Bond:  Bloomberg Barclays Global Aggregate ex-USD Total Return Index Value USD (50/50 blend of hedged and unhedged)

EM Debt (unhedged):  J.P. Morgan GBI-EM Global Diversified Composite Unhedged USD

Real Assets: S&P Real Assets

U.S. Large Cap:  S&P 500 Total Return Index

U.S. Small Cap :  Russell 2000 Total Return Index

International Developed:  MSCI EAFE Net Total Return USD Index

Emerging Markets:  MSCI Emerging Markets Net Total Return USD Index

World: MSCI ACWI Net Total Return USD Index

U.S. Equity REITs: FTSE Nareit Equity REITs Total Return Index USD

Commodities:  Bloomberg Commodity Total Return Index

Midstream Energy:  Alerian MLP Total Return Index

Hedge Funds:  Hedge Fund Research HFRI Fund of Funds Composite Index

Event Driven:  Hedge Fund Research HFRI Event-Driven Total Index

Relative Value:  Hedge Fund Research HFRI Relative Value Fixed Income-Convertible Arbitrage Index

Equity Hedge:  Hedge Fund Research HFRI Equity Hedge Total Index

Direct Fund Composite: Hedge Fund Research HFRI Fund Weighted Composite Index

Fund of Funds Composite:  Hedge Fund Research HFRI Fund of Funds Composite Index

Macro:  Hedge Fund Research HFRI Macro Total Index

International, 7% Emerging Markets, 5% U.S. Equity REITS, 6% MLPs

U.S.:  MSCI USA Net Total Return USD Index

China:  MSCI CHINA Net Total Return USD Index

Japan:  MSCI Japan Net Total Return USD Index

Germany:  MSCI Germany Net Total Return USD Index

India:  MSCI India Net Total Return USD Index

United Kingdom:  MSCI UK Net Total Return USD Index

France:  MSCI France Net Total Return USD Index

Italy:  MSCI Italy Net Total Return USD Index

Brazil:  MSCI Brazil Net Total Return USD Index

Canada:  MSCI Canada Net Total Return USD Index