President Biden has claimed that this recent bout of inflation is only transitory. However, many worry that inflation is here to stay. If this is the case, we’re going to have to learn to live with it. You’re probably wondering, though, how inflation works, how bad it’s been recently, and how you can not only live with it but benefit from it. In this post, we’ll attempt to answer some of those questions.
Basically, inflation is the general rise in prices in an economy over a specific period of time. The Federal Reserve typically targets a low rate of inflation, roughly 2%. But, inflation can creep up higher as a result of economic shocks. Recently, for the past decade, the inflation rate was actually below 2%, so in other words, prices were remarkably stable. However, in June, inflation stood all the way at 9.1%. This was the highest rate in over 40 years.
What To Do About Inflation
Inflation creates more uncertainty within the economy. Higher rates temp action by the Fed, who then raise interest rates. Importantly, the Fed raising rates can cause stocks and bonds to lose value. If nothing else, the threat of inflation is another reason to revisit how you’ve invested your money. It’s important to ensure your assets are diversified property. A diversified portfolio is one that isn’t too heavily dependent on any one type of asset. This is the first step toward protecting your finances.
Rest assured, there are places where you can keep your money where it’ll be kept safe (or even benefit) from inflation. While inflation reduces the value of each dollar, hurts retail customers, and can potentially hurt retirees living on fixed income. However, with the right moves, you can hedge your bets against inflation.
Ways to Hedge or Benefit From Inflation?
Inflation benefits holders of fixed-rate debt. For example, mortgages. It encourages consumption today rather than later, and lower inflation can be a sign of a growing economy. Furthermore, there are certain assets you can purchase in order to hedge inflation. Some of these assets include:
Real estate: Single-family homes financed with low, fixed-rate mortgages tend to perform well during times of high inflation. As it increases, your property is likely to appreciate in value. However, the monthly service cost of your mortgage will remain the same.
Commodities: Gold and other precious metal, as well as raw materials, tend to fair well during times of high inflation. As demand increases, prices rise, and the cost of production to meet that demand typically rises in lockstep. These assets are generally seen as a “safe-haven” during times of uncertainty. They aren’t connected to traditional investments such as stocks and bonds. They tend to move in an unrelated direction from them.
Value stocks: Research has shown that this variety of stocks tends to do better than growth stocks during times of high inflation. Value stocks are shares from companies that have strong earnings relative to their current share price. This often results in robust cash flows, which investors typically value when prices are rising.
Keeping Track of Your Rate
So, what’s your inflation rate? Where you’re spending money can tell you a lot about how exactly you’re being impacted by inflation. Where should you focus on cutting back? Where are some other places you can keep your money protected? You can learn more about how to manage your assets by contacting us.