Inflation certainly has been on everyone’s minds. Although inflation is down from its peak, the day-to-day costs many folks experience remain significantly higher than they were just a few years ago.
Inflation Snapshot (BEA PCE, released June 25, 2026)
Headline PCE: 4.1%
Core PCE: 3.9%
People are correctly not focused on the decline of the inflation rate. They are focused on what things cost every day. Inflation today is very visible. This includes paying for your gas, groceries and when you renew your insurance.
This is why inflation is so damaging, not because of one year, but because of the quiet effects that compound over time.
Recent History
Until recently, inflation has not been on many folks’ minds. The reason for this is straightforward. Inflation has been muted for an extended period.
One of the primary responses from the Government to the 2007-2009 Great Recession was to cut interest rates to near zero. Then they artificially held them there for well over a decade.
Interest rates and inflation do not move in lockstep, but policy responses tend to echo over time. As the saying goes, history never repeats itself, but it often rhymes.
The Federal Reserve Board (The Fed) has a dual mandate. Their mandate is “maximum employment and price stability.” We will leave the maximum employment mandate for another day.
To measure inflation, the Fed primarily uses the Personal Consumption Expenditures Index (PCE) Price Index. The headline inflation numbers are from the Consumer Price Index (CPI). As we have written about previously, understanding how government indexes are designed is crucial when interpreting inflation data as we wrote in Clear Reasons You Need to Carefully Review Government Statistics.
The Fed targets inflation of roughly 2% over time.
As many have learned the past few years, inflation is for real. For example, you spend $200 a week on groceries. If inflation were 2.5% annually, this would only buy $177 in five years. In ten years, it would only buy $156 of food. In other words, at 2.5% inflation, it buys about 22% less in just ten years, without accounting for taxes.
This illustrates why inflation is so challenging, not because of just one year, but because of the cumulative effect over time.
Inflation does not announce itself with a big bullhorn. It is quite the opposite. It shows up slowly, gradually, and silently.
How Does Inflation Reduce Your Purchasing Power Over Time?
Inflation reduces your purchasing power because each dollar buys less as prices rise over time. This scenario has played out before. We wrote about the parallels from a century ago in our post, 7 Easy Things Learned From the Roaring Twenties 2.0.
Before moving on, let us address what the worst hedge against inflation is, cash. That is right, cash. First, whatever you earn is subject to income taxes. Second, if inflation was 2.5%, then cash would lose 2.5%, every year.
After Taxes and Inflation, Your Purchasing Power Goes Down Every Year.
Do not get me wrong, you need cash. Some in your checking account, more in your savings account. Clearly some in your cash reserve account. While cash is not a hedge against inflation, some cash is always needed.
While cash is not a hedge against inflation, having the right amount of cash available is still an essential part of a financial plan. We discuss how to think about appropriate cash levels, accessibility, and preservation of principal in Practical Steps and Benefits of a Cash Reserve Fund.
Fighting inflation requires owning some assets that can adapt and rise as prices rise.
What can investors do to attempt to keep up with inflation? Here are 3 asset classes to consider.
Stocks With Strong Pricing Power
Stocks have generally been the best hedge against inflation over an extended period. Think multiple decades here, not just a few years. However, not all stocks have strong pricing power. Strong pricing power generally means these companies can pass on their higher costs to their customers. This means they can maintain consistent profit margins.
Strong pricing power is one of the considerations. There are others as we wrote about in What You Need to Know to Understand the Math of the Stock Market Now.
Industries that tend to have strong pricing power are software, healthcare, consumer staples, and financial services. Industries that tend to not have strong pricing power include commodity producers, utilities, and competitive consumer discretionary.
It is important to remember Why You Shouldn’t Chase the Latest Investment Fad.
Treasury Inflation-Protected Securities (TIPS)
The U. S. Government issues Treasury Inflation – Protected Securities. The maturity for these is for either 5, 10 or 30 years. The advantage with TIPS is that they adjust the principal payments based on inflation as measured by the (CPI). As these securities are backed by the U.S. Government, they give a clear inflation link.
It is important to note that individual TIPS held to maturity and TIPS mutual funds are taxed differently.
Where you hold inflation sensitive assets matters as much as what you own. In fact, read about why Asset Location is as Important as Asset Allocation when managing inflation on an after-tax basis, particularly when taxable income and phantom income come into play.
The easiest way to buy TIPS is through mutual funds. However, caution needs to be exercised when buying TIPS mutual funds. When buying TIPS mutual funds, there can be phantom income annually. Phantom income is when there is taxable income, but no cash is received. The phantom income is from the inflation adjustment.
The phantom issue is only relevant to taxable accounts. It does not matter in a 401(k) plan or a traditional IRA. If you are considering TIPS mutual funds, invest these in your 401(k) plan or a traditional IRA. This will eliminate the potential phantom income issue.
Real Estate
Caution needs to be exercised when investing in real estate. The old saw about real estate is that it was based on, “location, location, location.” Well, that still really does matter. However, now the type of real estate clearly also matters.
Keep in mind, when we mention real estate here, we are not talking about your primary residence. We are talking about investment real estate.
Several things have changed the dynamics of real estate over the last three decades. The first was the internet. This turned into e-commerce. Then Amazon dominated this space. We can see what happened to the retail bricks and mortar real estate. Shopping malls certainly have seen better days.
Second was the Covid-19 pandemic. Strictly from a real estate perspective, this spurred on two things. First was the work from home model. Employees were allowed (and still allowed in some circumstances) to work from home. This means they no longer had to work out an office. This depressed the values of commercial space in many large cities. Second, many folks either moved out of the big cities or just bought a second home in the suburbs. This, along with rising interest rates, elevated prices for homes and lack of inventory, has created a housing shortage.
Like all asset classes, there are currently sectors to consider and sectors to avoid. Multifamily, healthcare, real estate, data and industrial – logistics currently are benefitting from long-term demand trends. Conversely, office (see above), retail and senior housing are facing cost pressures.
How to Invest in Real Estate
One consideration for investing in real estate is how you would invest. Presuming you are not going to be the landlord, the primary tool for investing in real estate are Real Estate Investment Trusts (REITs). This is where money is pooled and professional managers run the funds.
Tax Reporting
Another consideration is tax reporting. Many, but not all mutual fund REITs will issue an IRS Form 1099-DIV (for dividends) that will report your annual income. A small number of REITs that are either private or non-traded will issue IRS Form K-1. While there is nothing wrong with receiving K-1’s it does complicate your income tax return. Additionally, K-1’s tends to be issued late which may cause you to have to put your income tax return on extension.
What Investments Can Help Protect Against Inflation?
Investments that may help protect against inflation include stocks with strong pricing power, Treasury Inflation Protected Securities (TIPS), and certain types of real estate. There are other potential inflation hedges like gold, commodities, and I-Bonds. However, these tend to play a supporting role as long-term inflation hedges.
Conclusion
Inflation does not create a crisis overnight. It works slowly, quietly, and consistently, reducing what your money can buy over time.
The real risk is not one year of higher prices, but the combination of inflation, taxes, and withdrawals working together over decades.
That is why planning for retirement income is no longer just about generating returns, it is about protecting your purchasing power.
Over time, inflation, taxes, and withdrawal decisions work together to reduce your purchasing power, which is why minimizing your lifetime tax bill is an essential part of protecting it.
If you have not recently reviewed how your retirement income plan holds up against inflation, it may be worth taking a closer look.
A simple stress test can help answer a few key questions:
- Will your income keep up with rising costs?
- Are you taking withdrawals in a tax-efficient way?
- Are you positioned to adjust if inflation stays higher for longer?
If you would like to walk through these questions together, call Thomas Scanlon at (860) 645‑1515 or by email at Thomas.Scanlon@raymondjames.com.
This is original content written by Manchester, CT Financial Advisor Thomas F. Scanlon, CFP®, CPA, (currently not practicing).
Image generated using artificial intelligence.
The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Thomas F. Scanlon, CPA, CFP® and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and subject to change.
Be advised that investments in real estate and in REIT’s have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REIT’s will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid.