Inflation may affect everyone, but it means different things to consumers and investors. As a consumer, dealing with inflation would mean less purchasing power if income remains stagnant while prices increase. Investors, on the other hand, see the situation as an opportunity to invest in inflation-proof assets or those that can match the pace.
There are a couple of investments that are known to do well in times of inflation, and we’ll discuss them in this article. Read on to also learn the basics of inflation and how it affects the economy.
Understanding inflation and its effect on asset value
To a layman, inflation is the steady increase in the prices of goods over time and the rate of such an increase in percentage. Essentially, it’s a quantitative measure, which means more emphasis on quantity over quality.
When there is a big change in either direction from a steady or moderate rate of inflation, it can be hard for consumers and investors. Apparently, such a deviation leads to noticeable economic disruptions. Various classes of assets can also be affected in unpredictable ways.
Despite how unpredictable the effects of inflation can be on assets and the economy, there are a few rules of thumb from history and economics.
Fixed rate debts suffer the most damage in value when inflation hits. Basically, the interest rate and repayment of the principal get devalued. Suppose the inflation rate is higher than the interest rate. In that case, lenders experience a loss after they adjust for inflation. In essence, investors would rather opt for real interest rates, which would mean subtracting inflation from nominal rates.
Also, short-term debts are less affected by inflation than long-term debts because the effect of inflation on the value of future payments grows and adds up over time.
To thrive or use inflation to your favour, the best bet would be to invest in assets that rise in value side-by-side with inflation. In the next section, we’ll explore some of these assets.
While the price per stake on your favourite games at JioMoney casinos in India may stay the same during inflation, the prices of real estate don’t. Real estate is an obvious choice for many investors looking to beat inflation. Amid inflation, real estate can provide increased income from rentals. You can choose to purchase real estate investment trust shares or invest directly.
Real estate is also vulnerable to financial crises and rising interest rates, which is something to keep in mind. Also, the monetary policy’s response to rising inflation is often interest rate increases.
When inflation picks up, investors often turn to tangible assets likely to rise in value.
At the start of inflation, investors opt for tangible assets that are sure to increase in value. People have invested in gold and other minerals for centuries, making them inflation-proof. There are mutual funds and exchange-traded funds from which investors can purchase gold.
A fact about investing in bonds is that the seemingly counterintuitive nature of inflation is very unfriendly to fixed-rate debt. However, when it comes to inflation-indexed dunds, the story is different. With these kinds of bonds, there are variable interest rates that match inflation.
Investing in stocks is one of the best ways to keep pace with rising inflation. Still, not all equity is strong enough to match the rate of inflation and keep you afloat. For example, if you invest in high-dividend stocks, they’ll get hit in the same way as fixed-rate bonds during inflation. The best thing for an investor to do is to focus on companies that can easily pass on their rising costs to their customers. A good bet would be consumer staple companies.