Inflation has been one of the major challenges facing the economy of many nations. Learning how to profit from inflation is a skill every business has to master. In this article, I’m going to show you can make the profit from inflation in a dwindling economy.
What is Inflation?
Inflation is defined as a general increase in prices in a given economy over a given time period. The Federal Reserve usually aims for a low and stable rate of inflation of around 2%, which indicates that the economy is growing. However, economic shocks can cause inflation to reach double digits.
Over the years, inflation has been a major challenge of most economies. Prices rose 10% to 15% in some years during the 1970s and 1980s. Inflation has slowed since then.
Inflation rates fluctuated between 2% and 5% in the 2000s, while they hovered between 0% and 2% in the 2010s. In other words, compared to other periods in history, prices have been remarkably stable in recent years.
Inflation, on the other hand, has recently resurfaced as a topic of discussion. Inflation was 5.4 per cent in the 12 months ending in July 2021, one of the highest rates in many years.
How does the inflation rate work?
The inflation rate is usually expressed as a percentage, indicating that the cost of a product or service is increasing. It occurs when the government or another entity maintains control over the price of goods and services. Wages and product prices, on the other hand, are allowed to rise or fall in response to demand.
This is an increase in the price of goods and services on an annual basis. Inflation is often regarded as an unavoidable aspect of life in a developed country. It is reduced when policies to control inflation are in place, and it is increased when certain goods or services are in short supply.
Many European countries adopted strict monetary policies in the 1980s to combat inflation and promote economic growth. This ushered in a period of rapid economic growth in Europe and North America, but with it came higher prices.
Types of Inflation
Inflation can be classified into three categories:
Inflation caused by demand outstripping production capacity is known as demand-pull inflation. In other words, there is a greater demand for goods than the current supply can meet. As a result, the cost of living rises.
Cost-push inflation occurs when rising production costs make producing the same goods more expensive for businesses. As a result of the increased cost of inputs, market prices rise.
Built-in inflation occurs when workers demand higher wages in order to keep up with rising living costs. This type of inflation can result in a feedback effect, in which businesses must continually raise prices to keep up with rising labour costs.
Is there any reason for me to think about inflation?
Inflation has a variety of unsettling effects, the most obvious of which is that it erodes your purchasing power over time. As inflation sets in, a dollar will purchase fewer goods and services than it did previously.
Because interest rates have been unusually low over the last decade, long-term investors and retirees alike have become more complacent about the threat of inflation. In the future, inflation must be recognized as a real threat to a comfortable retirement if it is not properly accounted for.
Inflation adds to the economy’s uncertainty. Inflationary pressures compel the Federal Reserve Board to act, which is expected to raise interest rates in response. In the short term, the Fed’s actions may cause stock market volatility, and rising rates may cause bond funds to lose value.
At the very least, the threat of inflation (and increased uncertainty) is an additional reason to review your investment strategy to ensure that your assets are properly diversified. A well-diversified portfolio that isn’t overly reliant on any single asset class is a good place to start when it comes to protecting your money from inflation.
What are the advantages and disadvantages of inflation?
- Inflation that is low and stable can be a sign of a growing economy.
- It is advantageous to those who have fixed-rate debt, such as mortgages.
- It encourages people to buy now rather than later.
- Inflation reduces purchasing power by reducing the amount of goods that each dollar can buy.
- Consumers are hurting as a result of higher prices across the economy.
- It is detrimental to retirees on fixed incomes.
- It prompts the Federal Reserve to take action.
- How to Make Money Off Inflation
Inflation is a blessing in disguise. How?
Consider inflation as an opportunity to reassess your entire portfolio, as it occurs with or without our permission. Even though inflation had recently risen, interest rates remained near-record lows as of August 2021.
One of the most effective ways to combat inflation is to make sure you’re properly diversified and fully invested on a regular basis. Long-term, money invested in stocks tends to outpace inflation, while real estate, commodities, TIPS, and I-bonds can only provide additional diversification. If interest rates begin to rise, cash on the sidelines will lose value, while long-term bonds will be impacted.
In general, inflationary periods (whether temporary or permanent) provide an opportunity to review your financial situation and make adjustments for the future.
How can I profit in an inflationary environment?
If you want to profit from inflation, here are five inflation protection strategies to help you stay afloat as prices rise:
1. The real estate market
During periods of inflation, single-family homes financed with low-interest, fixed-rate mortgages tend to perform well. As inflation rises, the value of your home is likely to rise while the monthly service cost of your mortgage remains constant. This is at the heart of accumulating home equity, which can significantly boost your net worth.
You can protect yourself from rising rents by purchasing real estate. Rents, like any other consumable good, tend to rise as inflation rises. Mortgages have an advantage over rental agreements when inflation is high, despite the fact that they are less flexible.
2. Stocks with a high value
According to some research, value stocks outperform growth stocks during inflationary periods. Companies with strong earnings relative to their current share price are considered value stocks. They’re also known for having strong cash flows, which investors prize when stock prices are rising.
Growth stocks, on the other hand, are more susceptible to interest rate fluctuations, which is a common monetary policy response to inflation. Growth stocks have had a great run in the last decade when inflation has been conspicuously absent. Value stocks, on the other hand, have recently made a comeback. Their success is likely to continue in the current environment.
3. Goods and services
Gold and other precious metals, as well as raw materials and other natural resources, are examples of commodities. Simply put, as the economy’s demand grows, prices rise, and the cost of production to meet that demand typically rises in lockstep.
During times of uncertainty, commodities are commonly viewed as safe-haven assets. Commodities, unlike stocks and bonds, do not pay dividends or represent any underlying business. They are also uncorrelated and move in opposite directions.
Treasury Inflation-Protected Securities, or TIPS, are marketable U.S. Treasury securities designed to protect against the erosion of purchasing power. TIPS benefit from periodic inflation adjustments, which are not available with traditional fixed-rate bonds.
TIPS should be considered as part of a lower-risk portfolio segment for investors seeking capital preservation and purchasing power stability. TIPS holders can rest assured that their principal will be returned because TIPS is backed by the United States government’s full faith and credit.
Savings bonds in the United States become attractive investments during inflationary periods. I-bonds promise to keep up with inflation, despite the fact that you can only buy $10,000 per year and they’re considered non-marketable securities. They, like TIPS, provide a nearly guaranteed return of capital.
Investing in I-bonds will not yield high returns, but it will preserve purchasing power for a portion of your portfolio. Given that many investments, such as cash and long-term bonds, are likely to lose real value during inflationary periods, it makes sense to consider alternatives to stocks that can keep up.
Bitcoin is frequently referred to as ‘digital gold,’ and because of its limited supply, it should theoretically protect against inflation. However, the jury is still out on whether it will be a good long-term inflation hedge.
Aside from bitcoin, you can also buy and invest in other coins.
Investors have several options for protecting themselves against inflation, but TIPS is the safest bet. Otherwise, take advantage of an inflation spike to review your overall investment performance and allocation to ensure it is in line with your objectives.
Lassus, a financial advisor, advises “Because most of us are still long-term investors, don’t make drastic changes based on current inflation or market conditions,”
You can profit from inflation in every way if you can follow these guidelines given out here.