Will Cooling Inflation Be Good for Your Brokerage Account?

In June 2022, annual inflation, as measured by the Consumer Price Index (CPI), reached an astounding 9.1%. Thankfully, inflation has been slowly but steadily declining since hitting that peak. And in April 2023, the CPI came in at 4.9% for annual inflation.

That's not great, as the Federal Reserve has made it clear that it wants to see inflation at 2%. It's this level, the Fed feels, that's most conducive to economic stability. And from a consumer spending perspective, 2% inflation is clearly a lot more palatable than 4.9% inflation.

If inflation continues to soften, it could cause the Fed to hit the brakes on interest rate hikes. Those rate hikes have been making it more expensive for consumers to borrow across a range of products, from auto loans to personal loans. But cooling inflation might also be a good thing for your brokerage account.

Ready for a break from a volatile stock market?

A big reason the stock market has been so volatile for the past year and change is none other than rampant inflation, and the resulting interest rate hikes on the part of the Federal Reserve. If inflation continues to slow down, it might, in turn, allow the stock market to calm down. And that could give investors a chance to regroup, reassess their portfolios, and make changes without having to worry about taking losses in the process.

Because the value of your investments has the potential to change over time, it's a good idea to examine your portfolio and do some rebalancing every so often. That could mean selling certain stocks and replacing them with stocks from different market sectors to attain the optimal level of diversification.

But it's hard to rebalance and sell stocks when the market is volatile because often, doing so will mean locking in losses. And that's clearly not something any investor wants to do. So if inflation cools and results in a period of stock market steadiness, a lot of people might benefit.

Also, cooling inflation could help quash some of the recession fears consumers and investors alike have been harboring. That, too, could be a good thing for your portfolio. In fact, if inflation cools enough, it could help spur a stock market rally, allowing investors who lost a fair amount of money in 2022 to get to a better place.

Will inflation levels keep dropping?

Based on the pattern we've seen over the past 10 months or so, it's fair to assume that inflation will, indeed, continue to cool. That doesn't mean we're going to get to 2% inflation in 2023, though. And it also doesn't mean the Fed is going to stop raising interest rates this year (though there's also a good chance it will).

But either way, if inflation continues to taper off, it could end up being a great thing for investors. So if you're not particularly thrilled with the state of your brokerage account at present, remind yourself that things very much have the potential to get better.