Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Some on Wall Street say the days of low inflation are over. Should investors be concerned? Joining me today to discuss the topic is Christine Benz. Christine is Morningstar's director of personal finance.

Hi, Christine. Thank you for being here today.

Christine Benz: Hi, Susan. It's great to be here.

Dziubinski: So, why all the talk of inflation right now, Christine?

Benz: Well, there are a couple of key reasons, Susan. One is that the vaccines are coming on strong, and there's a sense that in the second half of the year certainly we could be experiencing a strongly recovering economy. So, that's a good news story. A related issue is the stimulus package, where there are some concerns that because it is putting so much money in consumers' pocket and helping them in other parts of their lives as well that we may see some inflation related to that. It's kind of a convergence of factors. But the overarching theme is, we're coming out of this pandemic, there's a lot of pent-up demand, and we could see prices start to nudge higher. And in fact, we have started to see prices nudge higher in some areas.

Dziubinski: Do you think that investors should actually be concerned about inflation right now?

Benz: I think they should always have it on their radar, and it's an especially vexing thing for people who have a large share of their portfolios in investments that are earning fixed rates of return. Say, you have nominal Treasury bonds that are paying you a pretty small yield today. The risk is that if inflation heats up that that could gobble up everything you're earning. So, it takes a bite out of your income stream. I do think it's worth having on your radar. Although I would also say that we heard a lot of inflationary worries in the wake of the great financial crisis from 2007 through 2009, where we heard a similar set of concerns--that the package passed to rescue the economy would stoke inflation. We didn't really see it. We went on to have a decade's worth of very benign inflation. So, it's hard to say whether the predictions will come true.

Dziubinski: Now we've talked a little bit in the past about calculating your own personal rate of inflation and why that's something really to think about doing rather than relying strictly on outside benchmarks like the Consumer Price Index as a gauge of what inflation means for you specifically. Why are you a big proponent of this personal rate of inflation, and how does one go about beginning to get your arms around that?

Benz: Right. I do think it's something to at least give some thought to. The way to think about it is we see these inflation numbers like the Consumer Price Index. Well, that's a broad basket, and it's making assumptions about how you spend your money, and you may not be spending your money on the same basket of goods that is used in the CPI. I do think it's important to think about how you're spending money, to be observant about whether the areas where you're spending--about whether they're inflating or whether they're holding steady. We've seen food inflation creep up recently. If food is a big share of your household budget, you probably are experiencing that inflation firsthand. If healthcare expenses are a big share of your budget--well, we know older adults tend to pay more for healthcare out of pocket than do younger adults. So, pay attention to what you're spending money on when you're thinking about how much to care about inflation. But the short answer is: It matters for all of us because we're all spending money on some of these things some of the time.

Dziubinski: Let's say, you're a younger investor and you're still in accumulation mode, and you do find that, "OK, I am feeling a little bit of a personal rate of inflation going up here." What do you advise these investors be thinking about or doing?

Benz: Well, the best thing to do is just to make sure with respect to your investment portfolio that you're maintaining ample exposure to stocks. Because we know that over time while stocks are not any sort of good hedge against inflation--so you won't see stocks go up at the same time inflation goes up--what we know is that stocks over long periods of time have tended to have better returns than the inflation rate. So, making sure that you have ample stock exposure. Also making sure that you're paying attention to your savings rate. Because if we're having to pay more for stuff to go about our lives, that naturally impinges on our savings rates. So, making sure that, if we do see inflation, that's not unduly affecting your savings rate.

And then, another thing to consider would be homeownership. And certainly, this is a big question. There are many different facets of whether it makes sense to buy a home or not. But all else being equal, if we're in an inflationary environment, it will tend to be beneficial to be a homeowner, be a borrower because the money that you borrow and that you're paying back is worth less. So, you're sort of locking in a good deal for yourself. And then, the other thing to know is that if you are a homeowner, you're not exposed to rents, which can slide up as we see inflation begin to tick up. So, those are a couple of things for people who are accumulating assets for retirement to think about.

Dziubinski: Now what about folks who may be close to retirement or already in retirement and, say, they are beginning to see that, "Yes, my personal inflation rate is going up." What are some things that they should be mindful of?

Benz: This is a bigger deal for people who are in retirement because they are not earning a cost of living adjustment in the paycheck that they're taking out of their portfolios. Social Security gives them a little bit of a bump up to keep pace with inflation. But the portion of their portfolios that they're withdrawing to cover their living expenses are not inflation-adjusted in anyway. I do think that retirees, not just when they begin to see inflation, but when they embark on retirement, should make sure that they have adequate inflation hedges in their portfolio. I think that includes a healthy complement of inflation-protected bonds--to the extent that they have bonds in their portfolio, a good share of them should be inflation-protected bonds. And then, also making sure that retirees have adequate equity exposure as well, because they want the whole of their portfolio to be able to keep pace with inflation in some fashion, and we know that stocks over time do that. Those are a couple of things to consider.

Also, to the extent that you're purchasing any sort of insurance policy, say, a long-term-care insurance policy, to the extent that you can add an inflation rider that will protect you against inflation, that will increase your coverage to keep pace with inflation, that makes sense as well.

Dziubinski: Well, Christine, thank you so much for your time today and for some perspective on how we should be thinking about inflation. Appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski for Morningstar. Thank you for tuning in.