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US inflation reaches 40-year high: What does it mean for Australian investors?

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As inflation reaches record highs, here's what experts say you should do with your portfolio.

US inflation jumped to a 40-year high, but that does not mean it will be a lost decade for investors, an industry expert reveals.

The larger than expected rise in the year-on-year consumer price index (CPI) released by the US Labor department shows the price of everything continues to rise, despite its central bank, the Federal Reserve (Fed) lifting rates by 75 basis points last month.

On a monthly basis, the US CPI increased by the most in nearly 17 years. This was off the back of rising food, shelter and energy prices.

According to Tiger Brokers chief strategist Michael McCarthy inflation is now "shockingly high".

"This was both an increase on the previous month and above consensus forecasts, and directly contradicts notions that inflation has peaked," he said.

With a record high interest rate traders are now expecting the Fed to lift rates by as much as 100 basis points during their next meeting.

Overnight the US share market had a mixed reaction to the news, while in Australia the ASX200 opened relatively flat down 0.1% at its opening.

"Support for beaten down tech shares eased some of the weight on stock markets."

"Financial stocks were among the worst performers ahead of earnings reports from major players such as JP Morgan, Wells Fargo and Citigroup in the next few sessions," McCarthy said.

It is also having an impact on the energy market.

"Crude oil prices fell away as weekly inventory data showed weaker demand for gasoline, and energy share prices could come under pressure in trading today," he continues.

Why it won't be a lost decade

Despite all the doom and gloom, experts predict this is unlikely to be the 70s all over again.

But in the short run, volatility is likely to remain high.

According to Vanguard's senior economist Alexis Gray there's a silver lining even if the markets are having their worst start since World War 2.

"Because of lower current equity market valuations and higher interest rates, our analysis is now projecting slightly higher long-term returns in comparison to previous modelling," Gray states.

This is leading to her firm increasing its 10-year annualised forecast by 1.5 percentage points in comparison to 2021 for both equities and bond investors.

At the same time AMP Capital's chief economist Dr Shane Oliver said even with the current spike in inflation, it is unlikely to be as volatile and uncertain as the period between 1969 and 1982 was – a period that saw the US enter recession 4 times and Australia 3.

"So, while inflation may not go back to pre-pandemic lows and the longer-term tailwind for investment markets from ever lower inflation and interest rates may be behind us, a full on return to the 1970s malaise looks unlikely," he said.

But he does concede inflation is bad news for investors as higher interest rates make cash more appealing, the economy remains uncertain, and for shares a reduced quality of earnings as firms tend to understate depreciation when inflation is high.

"All 3 mean shares tend to trade on lower price to earnings multiples when inflation is high, and real growth assets (like property) generally tend to trade on higher income yields," he said.

What if inflation remains?

It's worth pointing out that experts have differing views on the damage inflation could do to your returns.

According to US investment giant Blackrock we are entering a new phase with central banks remaining less supportive of markets.

As such it said inflation will "last for years" and you shouldn't buy the share market dip.

"We could go back to the volatility seen in the 1970s," Blackrock's report said. "This regime is not necessarily one for 'buying the dip'. Policy will not quickly step in to stem sharp asset price declines."

Remember time in the market beats timing the market

Vanguard is also quick to highlight that even with falling markets and 40-year-high inflation, the "need to do something" could be hurting you over the long term.

Gray points out this is because timing the market is incredibly different with the best and worst trading days often occurring close together and irrespective of the overall market performance for the year.

"The data from the last 3 decades has a clear message for investors – even a bad year for markets can deliver some of the best single-day returns an investor will experience in their lifetime," she concludes.

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