Mitigating the inflation ‘tax’ on your business and investment portfolio

Rising inflation can feel like an additional burden for many taxpayers — a hidden liability, but without the tax policy behind it. Now that economic data confirms the trend of rising prices is extending into 2022, concerned investors and business owners may be struggling to navigate this inflation “tax.”

Let’s start by focusing on two February 2022 data points from the U.S. Bureau of Labor Statistics which show a 10% rate of rising prices among producers of goods, and 7.9% pace at which consumer prices are rising. These two points represent the increase of prices since only last year, showing that the trend of rising prices has a compounding impact on the economy, businesses, and investors.

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This inflation threat is now being taken seriously by policymakers. The Federal Reserve has made it clear that it intends to raise interest rates at least seven times by a quarter point this year (25 BPX) as a first step in tempering higher prices – announcing the first such hike at the recent March 2022 meeting. The reduction in asset purchases under so-called “quantitative easing” or QE programs put in place post the Great Financial Crisis represents the second step.

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Inflation is not simply an academic or policy discussion. For business owners, rising prices is a trend across industries, ranging from agriculture to manufacturing to construction.

While construction companies are seeing overall strengths in revenues and backlog given the post-COVID economic recovery, inflation impacts are also noticeably increasing. Price increases for materials, equipment, vehicles, and wage pressures around the tight construction labor market are all weighing on operating margins. Non-labor inputs are seen as the largest challenge to operations, including rising material costs due to supply chain pressures — nearly 85% of firms feeling the most stress are the largest firms in the industry.

However, given the threat of inflation, construction firms are taking proactive measures. Contracting terms and supply cost management are taking into account inflation effects on long-term commitments. Even firms with short contracting cycles must pay closer attention to the condition of key suppliers and the inflationary pressures moving up the supply chain. And all firms are looking at ways to improve operational efficiency to protect margins should rising prices prove to be sticky.

For investors, inflation is also a “tax” that needs to be managed closely as it can be the deciding factor to achieving one’s goals. Rising inflation and interest rates is a serious headwind to fixed income assets.

Chris Dhanraj

In the first six weeks of 2022, U.S. Treasuries have seen their biggest fall in over four decades, while municipal bonds through Feb. 8, 2022 have logged their worst year-to-date start ever with the Bloomberg Municipal Bond benchmark index falling 2.5%.

Investors should consider working with a financial advisor who can “stress-test” portfolios to show the impact of higher inflation on total returns — and take measures 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.

This article originally appeared on The Patriot Ledger: Rising inflation is being taking seriously by the Federal Reserve

https://news.yahoo.com/mitigating-inflation-tax-business-investment-210012256.html

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