Mitigating the Inflation “Tax” on Your Client’s Business and Investment Portfolio – InsuranceNewsNet


Rising inflation may seem like an added burden to many taxpayers – a hidden responsibility, but without the fiscal policy behind it. Now that economic data confirms that the upward price trend extends into 2022, worried investors and business owners may find it difficult to navigate this “tax” on inflation.

Let’s start by focusing on two February 2022 data points from the US Bureau of Labor Statistics that show a 10% rate of price increase among producers of goods and a 7.9% pace at which prices at the consumption increases. These two points represent the increase in prices since only last year, showing that the upward trend in prices has a cumulative impact on the economy, businesses and investors.

What is quantitative easing?

This inflationary threat is now taken seriously by policy makers. The Federal Reserve has made clear that it intends to raise interest rates at least seven times by quarter points this year (25 BPX) as a first step to temper rising prices – announcing the first hike of this type at the recent March 2022 meeting. The reduction of asset purchases under the so-called “quantitative easing” or QE programs put in place after the Great Financial Crisis represents the second step.

Inflation is not just an academic or political discussion. For business owners, rising prices are a trend across all industries, from agriculture to manufacturing to construction.

While construction companies are seeing overall strength in revenue and backlog given the post-COVID economic recovery, the impacts of inflation are also increasing materially. Rising prices for materials, equipment, vehicles and wage pressures in the tight construction labor market are all weighing on operating margins. Non-labour inputs are seen as the biggest challenge to operations, including rising material costs due to supply chain pressures – nearly 85% of companies feeling the most of stress are the biggest companies in the sector.

However, given the threat of inflation, construction companies are taking proactive measures. The contractual conditions and the management of supply costs take into account the effects of inflation on long-term commitments. Even companies with short procurement cycles need to pay more attention to the situation of key suppliers and inflationary pressures moving up the supply chain. And all companies are looking for ways to improve their operational efficiency to protect their margins should rising prices prove persistent.

For investors, inflation is also a “tax” that must be closely managed because it can be decisive in achieving one’s objectives. Rising inflation and rising interest rates are a serious headwind for fixed income assets.

In the first six weeks of 2022, US Treasuries saw their steepest fall in more than four decades, while municipal bonds through February 8, 2022 had their worst start since the start of the year with the benchmark Bloomberg Municipal Bond Index down 2.5%. .

Investors should consider working with a financial advisor who can “test” portfolios to show the impact of higher inflation on total returns – and take steps to mitigate the impact of higher prices.

The information contained herein is general in nature and is not intended and should not be construed as legal, accounting, investment or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.

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