Should You Keep Investing When Inflation Is Elevated? The Answer Is Simpler Than You Might Think.

Investors continue to pay close attention to artificial intelligence. This remains the hottest topic in the economy and markets.

However, inflation remains a stubborn issue that investors can't ignore. In June, the Consumer Price Index (CPI) increased by 3.5% year over year. That gain was driven by higher prices for food, shelter, and energy. Inflation is well ahead of the Federal Reserve's official long-term target of 2%.

Should investors keep buying stocks when we still have above-normal inflation?

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Don't deviate from your long-term strategy

Investors must always deal with macroeconomic concerns. There's rarely a time when the economy and market are certain. Whether it's inflation, interest rates, recessionary fears, trade policy, technological disruption, or anything else, the best investors can deal with the unknowns.

Investors should continue to allocate money to the stock market. This recommendation holds true now, during a period of elevated inflation that supports higher-for-longer interest rates, which are generally viewed as a headwind for stocks. Holding on to cash, on the other hand, is a surefire way to lose purchasing power.

In the past 10 years, the S&P 500 index generated a total return of 304% (as of July 27). Whatever starting sum of capital you put to work would've grown by a factor of four from then to today.

But the journey was anything but smooth. The market experienced corrections and bear markets. This volatility is typical, and it can't be avoided.

Clearly, investors who stay in it for the long term are rewarded. That's how compounding works. It punishes those who attempt to trade frequently and time the market. And it rewards those who let time do the heavy lifting. There's no reason to believe that this will change in the future.

History says discipline wins

Inflation has been stubbornly high since 2021. Blame gets placed on the unprecedented level of fiscal and monetary stimulus the government put in place to bolster the economy after the onset of the COVID-19 pandemic. The CPI's growth kept accelerating until June 2022, when it jumped at the fastest pace in more than 40 years.

If you had sold off your entire stock portfolio, or even stopped buying equities altogether, in the summer of 2021 when inflation was beginning to pick up steam, you'd have lost out on sizable gains. The S&P 500 index has climbed 68% in the past five years.

The perfect solution for investors is dollar-cost averaging. Consistently purchase shares in high-quality businesses, regardless of how the macroeconomic picture looks. This is a winning strategy.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.