Get ahead of the game during inflation – and stay ahead – with this no-nonsense investment guide.
What is inflation?
At its most basic, inflation is the increase in prices over time, the rate of which is expressed as a percentage.
Let’s take a very simple example:
Imagine you have a basket of goods in January and it costs €100.
In August of the same year, you buy exactly the same basket of goods in the same shop, but this time it costs €105.
The rate of consumer inflation – or price change over time – for this basket of goods is running at 5% over this time period.
If the same goods in the same shop in November cost €107, we would say that the consumer inflation rate is running at 7% for the period January–November.
And so on.
Some economists would put this a different way and say that inflation is when money loses value over time.
To help avoid your money losing value over time, you can consider investments and savings products with higher returns than the inflation rate. Nash is one app that can open up such opportunities. Check it out here.
How do we measure inflation?
Economists measure whether the cost of living is going up or down by analysing the change in price of a number of goods and services.
Many economists refer to two main measures of inflation:
1) The Consumer Price Index (CPI), which focuses on goods and services;
2) The Retail Price Index (RPI), which does the same but also includes housing costs, like mortgage interest, rent and council tax.
RPI is usually higher than CPI.
What kinds of investments work well during inflation?
It’ll be no surprise to hear that the assets that do well during inflation are the ones that go up in value as inflation goes up.
Examples of this are: rental properties, commodities, bonds, stocks and leveraged loans. But cryptocurrencies and related assets have recently also proven attractive alternatives to traditional investments.
Let’s take a look at each of these in a bit more detail.
- Real estate
Probably the most popular form of investment during inflation, buying real estate directly can generate increased rental income as inflation increases.
As the cost of living goes up, you raise the rent accordingly.
Should you not have access to a lot of capital, you can also invest in real estate by buying shares of a real estate investment trust (REIT) or a specialised fund.
Smart investors also turn to commodities when inflation goes up and there’s no reason you shouldn’t consider it too.
When many people think of investing in commodities, they think of gold. A centuries-old asset that always rises in price as inflation rises.
If you’re not in a position to buy bullion – which many of us certainly are not – you can still get in on the action by investing in a mutual fund or exchange traded fund (ETF) that owns gold.
Other commodities include raw materials and agricultural products like oil, copper, cotton and food sources. These tend to rise in price as the finished products that they help produce rise.
Another indirect way into the commodities market is to buy the shares of its producers directly or indirectly through an ETF or specialised mutual fund.
- Crypto assets
Cryptocurrencies are practically designed as a hedge against inflation. Currencies with fixed supplies can’t be affected by government policies to “print money”. Crypto represents another way of beating inflation when the rate goes up.
Crypto offers its investors big potential gains in short periods of time. But also threatens big losses in similarly abrupt periods.
To fight back against these volatile swings, it’s imperative to think longer term. Buy less crypto at more frequent junctures – called dollar-cost averaging – and have a plan to get out when you’ve made enough profit.
Nash allows you to buy thousands of different crypto assets directly with national currency and to exchange them for thousands of other coins at the touch of a button.
- Crypto-powered savings
A less volatile way to take advantage of crypto is to use crypto-powered savings, rather than crypto investments.
Crypto savings generate interest in a similar way to traditional banks, earning you interest by lending your funds out. The main difference is that with crypto there are no central banks setting the lending and borrowing rates or taking large cuts of the profit, so rates can often be higher.
Crypto-powered savings are not risk-free – for example, they can expose users in Europe to dollar-based crypto assets, and require trusting the underlying smart contract technology. However, they don’t harbour the same risks as crypto investments, which historically have been much more volatile than the dollar. You can still earn considerably more than a normal savings account. You can learn more about the difference here.
If you want to buy bonds during an inflation rise, make sure they’re inflation-indexed bonds that offer a variable interest rate tied to the inflation rate.
In America, Treasury Inflation-Protected Securities (TIPS) are popular with investors and direct investment in them can be made through a brokerage account or directly via the US Treasury.
Another option in this category are junk bonds: they have higher rates of default, so represent more of a risk, but do offer notably chunkier returns. Also known as “high-yield debt”, they tend to go up as inflation rises.
If stocks are your inflation-increase investment of choice, you could look at companies whose businesses are less sensitive to economic cycles – those within the consumer staples sector. The likes of Coca Cola, Nestlé, Procter & Gamble and Unilever are examples of consumer staples companies.
Is it really a good idea to make investments during inflation rises?
It really depends on how much risk you are prepared to take to preserve your portfolio’s worth and keep it growing.
Investing in stocks and TIPS can certainly help diversify your holdings, but you don’t want to invest too heavily in just one category. Consider other categories such as cryptocurrency and commodities.
The idea is to spread the risk across a number of holdings. Then, if something tumbles badly, you still have other options.
Good luck with your investment journey during inflation!
DISCLAIMER: This article is for informational purposes only and does not offer professional financial advice. For a full appreciation of investment strategies and risks in your particular situation, please consult a professional.