CPI Rises, Market Volatility: What Should You Do with Your Investments?

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When CPI rises and market volatility intensifies, your primary concern is whether your investment portfolio needs adjustments. In recent months, the U.S. CPI growth rate has continued to rise, for example, reaching 2.9% in August 2025, with the core CPI growth rate at 3.1%. In this environment, you can prioritize diversifying asset allocation and increasing the proportion of inflation-resistant assets. You don’t need to rush to increase or reduce holdings; instead, observe changes in economic data before selecting appropriate risk management tools.

Key Points

• When CPI rises, diversifying investments is an effective way to reduce risk. Allocating funds to different assets and industries minimizes the impact of volatility in a single market.
• Monitor CPI data changes and adjust interest-rate-sensitive assets, such as long-term bonds and growth stocks, to address risks from interest rate changes.
• Consider allocating 5-10% of your assets to gold to hedge against inflation risks. Gold typically performs well during high inflation periods.
• Adopt a dollar-cost averaging (DCA) strategy to spread out purchase timing, reducing risks from market volatility, suitable for long-term investment goals.
• Flexibly use hedging tools, such as commodities, gold, and Treasury Inflation-Protected Securities (TIPS), to enhance your portfolio’s risk resistance.

Impact of Rising CPI

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Interest Rate Changes

When focusing on rising CPI, you first need to understand its impact on interest rates. Rising CPI typically signals increasing inflationary pressure, prompting central banks to consider raising interest rates to control prices.

• In February 2024, U.S. CPI and core CPI both rose by 0.4%, with core CPI annually increasing by 3.8%, well above the 2% target, leading the Federal Reserve to maintain interest rates unchanged.
• In January 2024, core CPI rose by 3.9%, indicating persistent inflationary pressure, making it unlikely for the Fed to cut rates soon.
• In December 2023, CPI rose by 3.4% year-over-year, while core CPI slightly declined to 3.9%, showing that returning to the inflation target remains challenging.
  You need to closely monitor CPI data changes and adjust interest-rate-sensitive assets, such as long-term bonds and growth stocks, promptly.

Stock Market Performance

Rising CPI affects stock market volatility and investor sentiment. You’ll notice that during rising inflation, investors, concerned about declining purchasing power, may adjust their portfolios, leading to stock price fluctuations.

• CPI, as a key inflation indicator, affects corporate profitability and market sentiment.
• Rising interest rates increase borrowing costs, reduce consumer spending, lower corporate profits, and put pressure on stock prices.
• Different industries perform variably; consumer staples and utilities typically perform better, while non-essential consumer goods and some growth companies face pressure.
  You can reduce single-industry risks through diversified investments.

Bond Market Reaction

The bond market is highly sensitive to rising CPI. You’ll observe that as inflation rises, bond values typically decline, especially for long-term fixed-income products.

Asset Opportunities

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Large-Cap vs. Small-Cap Stocks

In a rising CPI environment, you may notice significant performance differences among companies of different sizes. Historical data shows that small-cap stocks often outperformed large-cap stocks during high inflation periods (e.g., the 1970s). Small-cap companies are more agile, able to quickly adjust operations to economic changes. In contrast, large companies may face more challenges in adjusting operations and pricing structures. You can consider moderately diversifying investments to avoid risks from single-scale stocks.

• Small-cap stocks perform better during high inflation periods.
• Small companies are more adaptable to economic changes.
• Large companies face greater difficulties in adjusting operations.

ETFs and Index Funds

If you want to reduce volatility risks from individual stocks, you can choose ETFs or index funds. These products cover multiple industries and companies, helping you diversify risk. Institutional investors often adjust portfolios during rising inflation expectations, increasing allocations to inflation-sensitive assets. You can also participate in physical asset stocks or growth-oriented assets through ETFs or index funds to enhance your portfolio’s inflation resistance.

Tip: ETFs and index funds have low management fees, are suitable for long-term holding, and can help you smooth real returns.

Gold and the U.S. Dollar

Gold and the U.S. dollar are often seen as safe-haven assets during rising CPI. Gold prices typically reflect market expectations of inflation in advance. Data shows that when inflation exceeds 5%, gold prices perform 2.3 times better than core CPI. You can consider allocating 5-10% of your assets to gold to hedge against inflation risks.

The dollar’s performance is mainly influenced by interest rate differentials and Fed policy expectations. If CPI data is high (e.g., core CPI at 0.4% or higher), the Fed may continue raising rates, increasing the dollar’s appeal. Conversely, lower CPI data reduces the dollar’s attractiveness.

Fixed-Income Products

When selecting fixed-income products, you need to consider inflation’s impact on different bonds. Inflation-linked bonds (e.g., TIPS) perform better during rising CPI periods because their value increases with inflation, providing protection. Traditional bonds may depreciate due to rising interest rates, lacking inflation protection.

You can strategically allocate inflation-sensitive assets to smooth real returns and achieve diversified investment goals.

Investment Strategies

Diversified Allocation

When facing rising CPI, diversified allocation is an effective way to reduce risk. You can allocate funds to different asset types and industries to minimize the impact of volatility in a single market or industry on your overall portfolio.

• Diversified Investing: You can balance investments between consumer staples and discretionary stocks to gain stability while capturing growth opportunities.
• Industry Diversification: You can diversify investments across sectors like food, beverages, and personal care to reduce reliance on a single industry.
• Geographic Diversification: You can invest in consumer goods companies with global influence and explore emerging markets to mitigate regional economic volatility.
  Financial advisors recommend increasing allocations to stocks, physical assets, and TIPS in an inflationary environment. Stocks offer higher potential returns, helping you outpace inflation, but they are more volatile. You can adjust stock allocations based on your risk tolerance. Physical assets outperform traditional portfolios during inflation, especially when inflation exceeds 2%.

Tip: Regularly review your portfolio structure and flexibly adjust asset proportions to ensure diversified allocation across multiple industries and regions.

Dollar-Cost Averaging

During market volatility and rising CPI, you can adopt a dollar-cost averaging (DCA) strategy. DCA helps you spread purchase timing, reducing market risks from lump-sum investments.
Below is the performance of different investment strategies during market volatility:

You can see that while lump-sum investments perform better in most cases, DCA effectively reduces losses during extreme market downturns. You can choose an investment method based on your liquidity and risk preference.

Note: DCA is suitable for long-term investment goals, helping you smooth costs and reduce emotional trading.

Hedging Tools

In an environment of increasing inflationary pressure, you can use hedging tools to protect your portfolio. Common hedging tools include commodities, gold, Treasury Inflation-Protected Securities (TIPS), defensive stocks, cash, and volatility ETFs.

• Commodities: You can invest in broad commodities like energy and agricultural products, which typically outperform gold during inflation.
• Gold: You can allocate part of your assets to gold as a safe-haven tool during inflation.
• TIPS: You can choose Treasury Inflation-Protected Securities, whose value adjusts with CPI changes, helping you mitigate inflation risks.
• Defensive Stocks and Cash: You can moderately hold defensive stocks and cash to enhance portfolio stability.
• Volatility ETFs: You can use volatility ETFs to hedge risks from sharp market fluctuations.

Tip: You can flexibly select hedging tools based on market conditions and personal needs to enhance your portfolio’s risk resistance.

Cash Flow Management

During the investment process, cash flow management is equally important. You can rationally manage cash inflows and outflows to ensure sufficient liquidity during market volatility or rising CPI to handle unexpected situations.

• You can maintain a certain proportion of cash or highly liquid assets to address emergency expenses or market opportunities.

• You can choose USD savings accounts from licensed Hong Kong banks for higher safety and liquidity.

• You can regularly assess your cash flow situation to avoid forced low-price asset sales due to liquidity shortages.
  Experts suggest increasing holdings in real estate or commodities during rising CPI, as these assets typically benefit from inflation. You can adjust asset allocations based on your needs, choosing inflation-resistant investments to protect your portfolio.

Note: Effective cash flow management helps you seize market opportunities and reduce risks from insufficient liquidity.

Risk Warnings

Market Sentiment

During rising CPI and market volatility, you may be easily influenced by emotions. Common investor behavioral biases include:

• Loss Aversion: You may hold losing assets to avoid admitting failure, limiting portfolio adjustments.
• Herd Mentality: You may follow others’ buying or selling during market volatility, leading to buying high and selling low, increasing loss risks.
• Recency Bias: You may overfocus on recent market performance, mistaking short-term fluctuations for long-term trends, potentially making poor decisions.
• Overconfidence Bias: You may overestimate your judgment, trading frequently and increasing transaction costs.
• Confirmation Bias: You may focus only on information supporting your views, ignoring opposing evidence.

You can maintain rationality by regularly reviewing investment decisions, focusing on long-term goals, and reducing the impact of short-term fluctuations on decisions.

Stop-Loss and Adjustments

During heightened market volatility, you can use stop-loss strategies to protect investment capital. Stop-loss orders automatically close positions when the market moves unfavorably, helping you limit potential losses. Setting appropriate stop-loss levels helps maintain trading discipline and avoid extreme decisions driven by emotions.

• Stop-loss orders act as a safety net, executing automatically to reduce human intervention.
• Reasonable stop-loss points protect capital, avoiding excessive single-transaction losses.
• Regularly evaluate stop-loss strategies and adjust flexibly based on market conditions.

You can choose a suitable stop-loss method based on your risk tolerance. Stop-loss isn’t foolproof but helps control risks in uncertain environments.

Policy Focus

During the investment process, you need to closely monitor policy changes and central bank communications. Recent U.S. market policy adjustments significantly impact investors:

• In 2023, 10-year Treasury yields rose from 3.31% in April to 4.99% by mid-October, then fell to 3.88%. Bond yields neared a 15-year high, attracting more capital to short-term bonds and cash.
• The Fed’s continued quantitative tightening has intensified market volatility, prompting investors to favor higher-liquidity assets.
• Central bank communication affects market expectations. Clear forward guidance helps you understand monetary policy directions. The Fed’s tone (hawkish or dovish) directly influences financial market reactions, leading to stock price fluctuations.

When interpreting CPI data, don’t over-worry about data manipulation. Focus on employment, consumption, and other economic indicators to comprehensively judge market trends. Stay sensitive to policy changes, adjust strategies promptly, and enhance your portfolio’s risk resistance.

When facing rising CPI and market volatility, you should prioritize stability, diversify assets rationally, and adjust strategies flexibly. You can refer to the table below to understand risk-adjusted return performance of different asset classes during inflation cycles:

You can adjust asset allocations based on your risk tolerance and long-term goals, avoid emotional trading, and continuously optimize your portfolio structure.

FAQ

How should you adjust your portfolio when CPI rises?

You can increase inflation-resistant assets like gold, TIPS, or commodity ETFs. You can also diversify investments to reduce reliance on single industries or assets, lowering overall risk.

Why does CPI data affect Federal Reserve interest rate decisions?

CPI reflects inflation levels. When CPI rises, the Fed typically raises rates to curb price increases. You need to monitor CPI changes and adjust interest-rate-sensitive asset allocations promptly.

How do gold and the U.S. dollar perform during inflation?

Gold typically rises during high inflation. The dollar’s performance depends on Fed policy. If the Fed raises rates, the dollar may strengthen. You can appropriately allocate gold and dollar assets.

Is dollar-cost averaging or lump-sum investing better during market volatility?

DCA spreads purchase timing, reducing short-term volatility risks. Lump-sum investing offers higher returns during market upswings. You can choose a method based on your risk preference.

How do you manage cash flow in investments?

You can maintain some cash or highly liquid assets. You can also choose USD savings accounts from licensed Hong Kong banks to ensure safety and flexibility in responding to market changes.

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