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As Inflation Ticks Up, Will You Be Ready?

Consumer confidence remains something of a bugbear across the United States. Despite historically low interest rates, near-record highs in the equities markets and improving unemployment figures, many consumers remained concerned about their present situation.

In April, the Thomson Reuters/University of Michigan preliminary sentiment index fell to 81.8 from 84.5, as Jeana Smialek elaborates on at Bloomberg. When the closely watched Consumer Confidence Index from The Conference Board is released this week, we can expect a similar dose of negativity.

What’s driving this pessimism? Economists tell us that mounting prices for food and the high cost of gasoline are making consumer pocketbooks thinner. While, overall,inflation in the U.S. remains relatively low (see a good explanation from Brent Nyitray at Yahoo! Finance), this serves as a reminder that prices will – and should – rise across the board.

April’s U.S. consumer prices reinforced the message as recent Producer Price Index (PPI) data suggest that inflationary pressures are starting to build. The 0.3% month-to-month rise in consumer prices pushed the annual inflation rate up to 2.0% in April from 1.5% in March. Excluding food and energy, core prices rose by 0.2% for the second month in a row, pushing the core inflation rate to an eight-month high of 1.8%, from 1.7%.

What does this portend for your investment portfolio? Here are three things to consider about the potentiality of rising prices:

1. For long-range investors, it is especially important to consider a portfolio that contains high-quality investments. Some of the characteristics of high-quality investments include, for example, strong companies that produce consistent dividends (on the equities side) and investment-grade bonds with low default rates (on the fixed-income side).

2. Another idea for long-term investors is to make sure that your portfolio is well diversified. Historically, some asset classes perform better than others during a period of rising inflation. Make sure to talk with your financial advisor about these potential opportunities.

3. Also keep in mind that, even in a period of rising inflation, the Consumer Price Index chart usually looks more like a row of shark teeth than a smoothly sloping line. In other words, inflation rarely rises in a strongly consistent pattern. So keep a close eye on the data over the coming months and years, and make sure you stay in contact with your advisor to be able to shift as needed when the numbers move.