By David Wismer I went into my local Walmart over the weekend to buy a number of items, including a 10-pack of 7.5-oz. Diet Coke. (Yes, I know it’s not the best thing to drink, but one “mini” can a day is better than the two regular-sized ones I used to drink.) This item cost $6.24 before the deposit, up from the $4.75 it cost a few months ago—or $3.50 on sale last year at my local supermarket. But I don’t want to trivialize the issue by talking about the price of soda. According to data from the Bureau of Labor Statistics , prices for food consumed at home “rose 11.9 percent over the last 12 months, the largest 12-month increase since the period ending April 1979.” That is creating real pain for the average American household. It was at least a little gratifying to see the price of crude oil come down over the past two weeks, although that has had a minimal impact for now on gasoline prices. While crude oil futures have dropped over 10% from recent highs, according to the American Automobile Association’s (AAA) tracking , retail gasoline prices have come down only about 9 cents, or less than 2%, for regular gasoline. In my area, a gallon of premium is still close to $6.00. Consumer sentiment continues to fall due to inflation concerns The University of Michigan’s closely watched consumer sentiment survey was released last Friday. It continues to reflect the impact of inflation on the personal economic outlook of many Americans. According to the University of Michigan Surveys of Consumers , sentiment fell 14.4% in June, an all-time low for the survey and “comparable to the trough reached during the 1980 recession.” A recent University of Michigan news release states, “All components of the index fell this month, with the steepest declines in the year-ahead outlook for the economy, down 24% from May, and consumers’ assessments of their personal financial situation, which worsened about 20%,” said U-M economist Joanne Hsu, director of the surveys. … ‘While consumers still appear relatively optimistic about the stability of their incomes, their perceptions of the economy are much more strongly influenced by concerns over inflation,’ Hsu said.” Consumer sentiment, according to prior statements from the Federal Reserve and Fed Chair Jerome Powell’s recent testimony before Congress, continues to inform monetary policy regarding the battle against inflation, along with many economic factors. Said Powell regarding the recent 75-basis-point rate hike, “We got the CPI data and also some data on inflation expectations late last week, and we thought for a while, and we thought this is the appropriate thing to do. … The preliminary University of Michigan reading … was quite eye-catching, and we noticed that. …” And before the Senate Banking Committee he emphasized, “At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. …We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.” But, under questioning , Powell also admitted that the tools at the Fed’s disposal would not have an immediate impact on prices for food and energy. And in terms of quickly fighting overall inflation, according to Business Insider’s summary, Powell said that will depend on some factors “we don’t control.” It is little wonder that, according to the University of Michigan survey, about 47% of consumers blamed inflation for eroding their living standards and many have significant concerns about the future—including the threat of a recession. Inflation’s impact on investment portfolios We are all experiencing the impact of inflation across many areas of our daily lives, but what about the long-term impact on investment portfolios? One of the writers for Proactive Advisor Magazine, behavioral finance expert Richard Lehman, took on this issue in an article earlier this year . He concluded that while most investors emotionally react to drops in their portfolio value of over 10%, they largely ignore the effect of inflation on their wealth. In a perfect world, he wrote, “every investment would be assessed for its risk-adjusted, after-tax, after-inflation return.” How investors perceive inflation is so well known, he says, that it has its own name: the “money illusion”: “The money illusion is pervasive, though actually rather simple. It essentially says that people ignore the effects of inflation on their income and wealth, viewing both in nominal terms rather than real terms. In other words, people are content to overstate increases in wealth or income, even while knowing intellectually that their buying power erodes steadily over time.” The article offers several prescriptive measures for both financial advisers and their investor clients on how to better focus on the impact of inflation, particularly in terms of the reexamination of financial-plan assumptions to consider inflation-related adjustments going forward. Says Lehman, “As a recent blog post points out, will ‘even “just” higher near-term inflation negatively impact recently retired clients, who are particularly susceptible to sequence of return risk?’” * * * Flexible Plan Investments is highly cognizant of inflation in the context of the construction, analysis, and performance monitoring of its strategy offerings. These strategies are built around quantified, active investment management and strategic diversification. To this point, FPI’s proprietary Market Regime Indicators display the current state of the market and economy at a glance. Using the Growth & Inflation Indicator, financial advisers and their investor clients can discover which FPI strategies perform the best historically in each type of regime related to economic growth and inflation: “Stagflation, Normal, Deflation, Ideal.” The current Growth and Inflation Market Regime continues to be one of Stagflation, which is characterized by the real economic growth rate (GDP) falling and inflation (CPI) rising. Please see this week’s Market Update , prepared by FPI’s Research department, which further discusses the current readings of the Growth & Inflation and Volatility indicators and what they mean for the relative performance of various asset classes. Overall, FPI’s Market Regime Indicators help provide a visual guide to market cycles, the benefits of portfolio diversification, and the expected relative performance of asset classes and FPI strategies in different regime types. All of this is in line with FPI’s overall investment philosophy—the theory and practice that one needs strategies that can be responsive to various market environments and that no single investment approach works in every market environment all of the time.