How Smart Investors Anticipate and Deal With Inflation

Img Source - Seed Formations

Most of us have accepted a small rate of inflation as a necessary backdrop for the economic world. We expect prices to rise over time – and we aren’t too concerned about it. But when inflation rates spike, it can cause major problems for people in all walks of life.

How do smart investors anticipate and deal with this economic phenomenon?

What Is Inflation?

Economic inflation is a rise in the prices of goods, across most (if not all) areas, resulting in a loss of purchasing power for a given currency. While there are several variables that can influence inflation, the main root cause of inflation is an increase in the money supply.

This is something you should understand intuitively. Let’s say there’s a massive shortage of new vehicles in the United States. Accordingly, we would expect the price of the average new vehicle to rise. Now imagine there’s a flood of new vehicles on the market, overwhelming dealerships and giving consumers a wide variety of options to choose from, fully saturating demand and then some. What would happen to the price of a new car?

You should expect the price of a new car to decrease. That’s because new cars became less valuable and there were more new cars for consumers to buy.

A similar effect happens when circulating currency increases; because it’s more abundant, its purchasing power correspondingly decreases.

This is a financial issue for millions of people, because inflation affects the price of goods sooner than it impacts your wages or salary, at least in most cases. That means your money doesn’t go as far as it used to, potentially worsening your financial position.

Fortunately, there are some smart ways you can hedge against inflation and potentially even take advantage of it.

How Smart Investors Deal With Inflation

These are some of the most common ways smart investors deal with inflation.

·       Real estate. Commercial real estate is an excellent investment to make when you’re anticipating inflation, says CrownCommercialPropertyManagement. Real estate has historically been one of the best asset classes for investors, and it performs well even as prices rise and economies struggle. Even more importantly, purchasing real estate gives you an opportunity to secure good debt in the form of mortgages. As long as you don’t over-leverage yourself, you can take advantage of the weakening purchase power of the dollar; debt is actually favorable in an inflationary environment.

·       REITs. If you don’t want to purchase individual properties, you can get exposure to the real estate market in the form of real estate investment trusts (REITs). These asset classes can be bought, sold, and held like stocks, but they give you indirect exposure to properties held by managers in this organization.

·       Early investments. Inflation affects stock prices and real estate prices, like anything else. Accordingly, the earlier you invest, the better whenever you anticipate inflation. Of course, this is good advice even if we take inflation out of the equation; earlier investments have more time to grow.

·       Precious metals. Many people believe precious metals to be a good hedge against inflation. Metals like gold, silver, and platinum have functional value and value as a currency separate from dollars and other centralized currencies.

·       Commodities. Other commodities and commodity funds are also good hedges against inflation, as they’re somewhat insulated from the effects of this phenomenon.

·       Cryptocurrencies. Cryptocurrencies like Bitcoin are decentralized and mostly immune from the effects of monetary policy. However, they are also new and somewhat risky investments.

Anticipating Inflation

Mainstream economists believe that inflation is actually a good thing for the economy, despite its negative connotations. That’s because inflation is a motivating factor to take economic action as quickly as possible; companies are motivated to produce and distribute goods while purchasing power is as high as possible, while consumers are motivated to purchase those goods because they know prices will rise in the future.

Because of this, you can always anticipate inflation to persist, at least at a background level.

But what about inflation spikes?

Again, there are many variables that can influence the rate of inflation, but the biggest factor to consider is the money supply. If you want to keep accurate tabs on changes in the money supply, pay close attention to the Federal Reserve. Lower interest rates, quantitative easing, and other aggressive actions by the Fed typically set the groundwork for higher inflation in the future. Conversely, higher interest rates, quantitative tightening, and other passive actions by the Fed set the groundwork for lower inflation in the future.

Of course, as always, you should do your own due diligence when making any kind of investment decision. Still, any savvy investor can tell you that better understanding and anticipating inflation can help you in pursuit of your personal financial goals.