I used to predict the total purchase price before the cashier scanned the items when I went grocery shopping. I used to get it right, but recently I discovered something intriguing and terrifying. Most of the time, I was wrong. I was wondering if I had spent more money than usual, but this was not the case. I discovered that the price is rising. I've never experienced inflation in my entire life. I had heard about it when it happened in the 1970s or after WWII, but this time I was actually hit by it. It was frightening because the money I earned at work was not rising at the same rate as the cost of goods and services. To keep up with the rising prices, all I can do is invest wisely. As a result, I wanted to read and learn more about inflation.
What is inflation?
Inflation, or an increase in prices over time, leads you to lose purchasing power. If inflation rises high enough, this might change a seemingly favourable return into a negative one. Owning a bond that pays 5% interest yearly, for example, may appear to be a good investment, but if inflation reaches 6%, your true return will be minus 1%.
Are we in an inflationary environment?
The Consumer Price Index rose 6.2 percent in the year to October, the highest rate since 1990. Inflation rates continue to be far higher than the Fed's target of 2% annual gains over time. Consumer prices rose at the fastest rate in more than three decades, as fuel costs rose, supply chains remained under pressure, and rents rose. The economy has never experienced such widespread shutdowns and restarts.
What's gonna happen?
If current trends continue, Fed will be under increasing pressure to accelerate their plans to withdraw economic support by ending their stimulus bond-buying program and raising interest rates from rock bottom sooner and more quickly. Market pricing indicates that investors are increasingly expecting the central bank to raise interest rates.
What should we invest our money in?
Diversification is the best inflation hedge. Broader equity markets typically advance in tandem with inflation, but some equities contribute significantly more to inflation.
Bank stocks are a good investment because they will benefit from the anticipated rise in interest rates, which is often associated with rising inflation.
You can also invest in specific commodities on the futures market via exchange-traded funds (ETFs), or directly in commodity-producing companies via ETFs or mutual funds.
Another equity asset class that is already benefiting from inflation is real estate. You can invest in real estate investment trusts (REITs), which are companies that own and operate residential, commercial, and industrial real estate, earning income from rents as well as capital gains from price appreciation.
Bond prices are no longer rising while yields are falling, so you should avoid investing in fixed income other than short-term bonds.
Companies in the service economy, such as restaurants and retailers, maybe less appealing in an inflationary environment because their costs for both supplies and employee wages are rising.
That's all I have to offer to protect our portfolio from inflation. I hope the Fed or the US government takes action to combat inflation as soon as possible. All eyes are on who will be the next chairman of the Federal Reserve. I've heard that the other candidate, in addition to Jay Powell, is more dovish. Whoever is chosen as chair, will have a difficult start to their tenure.
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