Does the threat of hyperinflation keep you awake at night? Is inflation even a consideration for you? Perhaps your company is new, or you have never worked during a period of increased inflation.
The last time annual inflation in the United States exceeded 4%, as measured by the CPI (Consumer Price Index), was in 1991.
Since then, the CPI has averaged a 2.5 percent yearly increase for the last 20 years, from 1992 to July of 2012. Compare this to the previous 24 year period from 1968 to 1991, when inflation soared more than 6% annually. These are two completely distinct environments to function in. Are you prepared to face it?
Of course, not all economists believe that we are in the midst of a time of rising inflation, or, if we are, what would be the primary trigger. Ask three economists a question, and you’ll probably receive five different responses, as someone famously said. Many people believe that the Federal Reserve’s recent provision of massive amounts of liquidity and a big monetary base will result in excessive inflation. In his new book, The Age of Turbulence, former Fed Chairman Alan Greenspan predicts that the flow of people into the workforce in developing countries like China would decelerate, resulting in increased wage pressures and higher prices. He further claims that the impact will be global. ii Bill Gross, the manager of Pimco’s largest bond fund, has warned investors that more inflation is on the way as a result of central bank stimulus that has generated a “ocean of credit.” Mr. Gross predicts that this will develop gradually over time, and that it will likely persist for many years.
Inflationary pressures can wreak havoc on your organization, slashing profits and lowering valuations. How are you going to prepare for inflation? What options do you have?
Inflation Preparation: Here are ten steps you can do right now to protect yourself from future increases in inflation:
- Debt with a variable interest rate. Convert your adjustable or variable rate term loan or other debt to a fixed rate now, while interest rates are still low. If inflation begins to grow, the Federal Reserve will raise interest rates to offset the trend. Greenspan forecasts double-digit interest rates in the next years in his bookii.
- Contracts for supply. Examine your supply chain connections and contracts, and extend long-term fixed price agreements to lock in excellent quality suppliers now. This is especially true if you’re buying commodities, which tend to react to inflationary pressures first and fastest. Agreeing to inflation rate modifications is a no-no.
- Contracts with customers. Examine your client contracts to ensure that you have the flexibility to alter pricing as needed to pass on increasing costs, or even better, that you can raise rates at any time with little warning.
- The cost of living rises. If the market and your contracts allow you to raise pricing today, consider a little increase every six months or so to stay ahead of the curve. Start re-pricing each new project if you have a custom business. If you bundle products, think about switching to an unbundled strategy in the future to help your customers cope with price increases.
- Reduced costs. Redouble your efforts to cut costs from the company. You’ve undoubtedly been doing some of this for a while, but now is the moment to revisit those investment opportunities you passed on previously because “you didn’t want to spend the money.” In a period of strong inflation, future savings will be multiplied.
- Purchase assets. Consider borrowing today to purchase core productive assets or a new firm, then repaying the debt with cheaper currency later. Long-term leases with today’s low rates are a viable alternative to taking out a loan.
- Rent. Consider long-term extensions to lock in low rates while you can if renting your facilities is still the best option in your situation.
- Employees. Make sure you have a good balance of full-time and contingent workers. As cost or competitive constraints dictate, you’ll be able to be more flexible in the future. Also, if you have collective bargaining agreements, try to eliminate or reduce the impact of cost-of-living provisions. Non-union staff should be moved entirely to a performance-based compensation structure, with no merit increases across the board.
- Customer service is really important. If you do have to raise pricing, make sure your customers have plenty of other reasons to stick with you rather than price shop. Investing in excellent customer service can be a low-cost way to maintain market share.
- Collections. Now is the time to take care of any outstanding collection difficulties. Customers, particularly distributors, will try to stretch out contracts and use your money to run their business during inflationary times.
It has been suggested that economic forecasters exist solely to make weathermen seem good. So you’ll have to decide for yourself whether or not we’ll see big inflation in the future. However, if you believe such is the case, there is no need to lose sleep over it. You can start planning your strategy for preparing for inflation today so that your company’s worth is preserved tomorrow.
How do you deal with rising prices?
For many Canadians, high inflation can be a source of financial hardship. One strategy to combat inflation is to increase your income to match prices, but this is tougher said than done for a variety of reasons.
If producing extra money isn’t an option right now, here are some other options for dealing with rising expenditures.
Reassess your spending habits
Take a look at your cash flow and where it’s going if inflation is making it tough to stick to your budget. Determine whether there are any items you can live without temporarily in order to cover needs such as housing, groceries, transportation, and utilities. For many, this reevaluation will mean putting non-essential spending like dining out, subscription services, and gym memberships on hold.
Take on new debt sparingly (and avoid variable rates)
Although the Bank of Canada kept debt interest rates low to combat inflation throughout the epidemic, rates are projected to rise at some point in 2022. Variable-rate debts could become more expensive if this happens.
You may refinance your variable-rate mortgage into a fixed-rate loan or combine high-interest credit card debt into a personal loan with regular payments to protect yourself from this abrupt surge.
Also, be mindful of taking on a lot of new debt in general: additional debt adds a new monthly payment to your budget and restricts your financial freedom, even if rates are low or fixed.
Become a sale shopper
When it comes to necessities, now is the time to get serious about being a discount shopper. This doesn’t imply you should become a rabid couponer; rather, you should pay greater attention to sales and let them drive where and when you shop.
Another wise method to economize is to take advantage of price matching rules. It could mean getting a great deal on something you need or obtaining a refund if something you just bought goes on sale later.
Maximize loyalty and reward programs
When it comes to grocery stores, many Canadians take advantage of membership programs given by their preferred retailer, such as PC Optimum (the loyalty program operated by Loblaw Companies and Shoppers Drug Mart). Before you go shopping, take a few minutes to check out your program’s app or website to see what bargains are available. Use them to get ideas for your shopping list and get bonus points for future purchases.
Don’t forget to include in any credit card points or incentives you’ve earned. You might be able to use them to get cash back, travel discounts, and other benefits. Furthermore, certain credit card issuers conduct special promotions from time to time where you can redeem points for items or gift cards, which could come in handy and save you money.
Be strategic with savings
High inflation has more bad consequences than just rising prices: it can also mean earning less interest on your investments. Consider a Guaranteed Investment Certificate if you’re concerned about investment volatility or don’t like the fluctuating rates of high-interest savings accounts. Your money will be unavailable for a length of time (from a few months to many years) if you invest in a GIC, but the interest rate will be fixed. During instances of strong inflation, your HISA or investment profits may decline, but a GIC will yield interest at a steady rate.
What industries benefit from inflation?
Inflationary times tend to favor five sectors, according to Hartford Funds strategist Sean Markowicz: utilities, real estate investment trusts, energy, consumer staples, and healthcare.
How can I plan for inflation in 2022?
With the consumer price index rising at a rate not seen in over 40 years in 2021, the investing challenge for 2022 is generating meaningful profits in the face of very high inflation. Real estate, commodities, and consumer cyclical equities are all traditional inflation-resistant assets. Others, like as tourism, semiconductors, and infrastructure-related investments, may do well during this inflationary cycle as a result of the pandemic’s special circumstances. Cash, bonds, and growth stocks, on the other hand, look to be less appealing in today’s market.
Do you want to learn more about diversifying your investing portfolio? Contact a financial advisor right away.
Do banks fare well in times of inflation?
Inflation in the United States continues to rise, with the price index for American consumer spending (PCE index), the Fed’s preferred measure of inflation, rising at a rate of 4.2 percent in the year ended July, its highest level in over 30 years. Furthermore, core prices rose 3.6 percent, excluding volatile goods like food and energy. The figures come as a result of rising demand for products and services, which has outpaced supply systems’ ability to keep up following the Covid-19 lockdowns. Although the Fed is optimistic that inflation will fall, noting that it would likely lower its $120 billion in monthly asset purchases this year, the figure is still significantly above the Fed’s target of 2% inflation.
However, we believe that inflation will continue to be slightly higher than historical levels for some years. Personal savings, for example, have increased as a result of the epidemic, and the continuance of low interest rates over the next two years could result in higher prices for goods and services. Companies in the banking, insurance, consumer staples, and energy sectors are among the companies in our Inflation Stocks category that could stay steady or even benefit from high inflation. Compared to the S&P 500, which is up roughly 18% year to date, the theme has returned around 15%. Exxon Mobil has been the best performer in our topic, with a year-to-date gain of 28 percent. Chubb’s stock has also performed well this year, with a gain of roughly 20% thus far. Procter & Gamble, on the other hand, has been the worst performer, with its stock climbing only roughly 4% year to date.
Inflation in the United States surged to its highest level since 2008 in June, as the economy continues to recover from the Covid-19-related lockdowns. According to the Labor Department, the consumer price index increased by 5.4 percent year over year, while the core price index, which excludes food and energy, increased by 4.5 percent. Prices have risen as a result of increased demand for products and services, which has outpaced enterprises’ ability to meet it. Although supply-side bottlenecks should be resolved in the coming quarters, variables such as large stimulus spending, a jump in the US personal savings rate, and a continuance of the low-interest rate environment over the next two years could suggest inflation will remain high in the near future.
So, how should equities investors respond to the current inflationary climate? Companies in the banking, insurance, consumer staples, and energy sectors are among the companies in our Inflation Stocks category that could stay steady or even benefit from high inflation. Year-to-date, the theme has returned nearly 16%, roughly in line with the S&P 500. It has, however, underperformed since the end of 2019, remaining about flat in comparison to the S&P 500, which is up around 35%. Exxon Mobil, the world’s largest oil and gas company, has been the best performer in our topic, with a year-to-date gain of about 43%. Procter & Gamble, on the other hand, has underperformed, with its price holding approximately flat.
Inflation in the United States has been rising as a result of plentiful liquidity, skyrocketing demand following the Covid-19 lockdowns, and supply-side limitations. The Federal Reserve increased its inflation projections for 2021 on Wednesday, forecasting a 3.4 percent increase in personal consumption expenditures – its preferred inflation gauge – this year, a full percentage point more than its March projection of 2.4 percent. The central bank made no adjustments to its ambitious bond-buying program and said interest rates will remain near zero percent through 2023, while signaling two rate hikes.
So, how should stock investors respond to the current inflationary climate and the possibility of increased interest rates? Stocks in the banking, insurance, consumer staples, and energy sectors might stay constant or possibly gain from increasing inflation rates, according to our Inflation Stocks theme. The theme has outpaced the market, with a year-to-date return of almost 17% vs just over 13% for the S&P 500. It has, however, underperformed since the end of 2019, remaining about flat in comparison to the S&P 500, which is up almost 31%. Exxon Mobil, the world’s largest oil and gas company, has been the best performer in our subject, climbing 56 percent year to far. Procter & Gamble, on the other hand, has lagged the market this year, with its shares down approximately 5%.
Inflation has been rising, owing to central banks’ expansionary monetary policies, pent-up demand for commodities following the Coivd-19 lockdowns, company inventory replenishment or build-up, and major supply-side constraints. Now it appears that inflation is here to stay, with the 10-Year Breakeven Inflation rate, which represents predicted inflation rates over the next ten years, hovering around 2.4 percent, its highest level since 2013.
So, how should equities investors respond to the current inflationary climate? Stocks To Play Rising Inflation is a subject that contains stocks that could stay stable or possibly gain from higher inflation rates. The theme has outpaced the market, with a year-to-date return of almost 18% vs just over 12% for the S&P 500. However, it has underperformed since the end of 2019, returning only roughly 1% compared to 30% for the S&P 500. The theme consists primarily of stocks in the banking, insurance, consumer staples, and energy sectors, all of which are expected to gain from greater inflation in the long run. Metals, building materials, and electronics manufacturing have been eliminated because they performed exceptionally well during the initial reopening but appear to be nearing their peak. Here’s some more information on the stocks and sectors that make up our theme.
Banking Stocks: Banks profit from the net interest spread, which is the difference between the interest rates on deposits and the interest rates on loans they make. Higher inflation now often leads to higher interest rates, which can help banks increase their net interest revenue and earnings. Banks, on the other hand, will benefit from increased credit card spending by customers. Citigroup and U.S. Bank are two banks in our subject that have a stronger exposure to retail banking. Citigroup’s stock is up 26% year to date, while U.S. Bancorp is up 28%.
Insurance stocks: Underwriting surplus cash is often invested to create interest revenue by insurance companies. Inflationary pressures, which result in increased interest rates, can now aid boost their profits. Companies like The Travelers Companies and Chubb, who rely on investment income more than their peers in the insurance industry, should profit. This year, Travelers stock has increased by around 12%, while Chubb has increased by 8%.
Consumer staples: Consumer equities should be able to withstand increasing inflation. Because these enterprises deal with critical products, demand remains consistent, and they can pass on greater costs to customers. Our theme includes tobacco behemoth Altria Group, which is up 21% this year, food and beverage behemoth PepsiCo, which is almost flat, and consumer goods behemoth Procter & Gamble, which is down around 1%.
Oil and Gas: During periods of rising consumer prices, energy equities have performed admirably. While growing economies are good for oil demand and pricing, huge oil corporations have a lot of operating leverage, which allows them to make more money as revenue climbs. Exxon Mobil, which has gained a stunning 43 percent this year, and Chevron, which has risen roughly 23 percent, are two of our theme’s picks.
Heavy equipment manufacturers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players are among the companies in our Capex Cycle Stocks category that stand to benefit from increased capital investment by businesses and the government.
What if you’d rather have a more well-balanced portfolio? Since the end of 2016, this high-quality portfolio has regularly outperformed the market.
Inflation favours whom?
- Inflation is defined as an increase in the price of goods and services that results in a decrease in the buying power of money.
- Depending on the conditions, inflation might benefit both borrowers and lenders.
- Prices can be directly affected by the money supply; prices may rise as the money supply rises, assuming no change in economic activity.
- Borrowers gain from inflation because they may repay lenders with money that is worth less than it was when they borrowed it.
- When prices rise as a result of inflation, demand for borrowing rises, resulting in higher interest rates, which benefit lenders.
What should you buy before hyperinflation takes hold?
At the very least, you should have a month’s worth of food on hand. Depending on your budget, it could be more or less. (I cannot emphasize enough that it must be food that your family will consume.)
If you need some help getting started, this article will show you how to stock up on three months’ worth of food in a hurry.
Having said that, there are some items that everyone will want to keep on hand in the event of a shortage. Things like:
- During the early days of the Covid-19 epidemic, there were shortages of dry commodities such as pasta, grains, beans, and spices. We’re starting to experience some shortages again as a result of supply concerns and sustained high demand. Now is the time to stock your cupboard with basic necessities. Here are some unique ways to use pasta and rice in your dinners. When you see something you like, buy it.
- Canned goods, such as vegetables, fruits, and meats, are convenient to keep and can be prepared in a variety of ways. Individual components take more effort to prepare, but also extend meal alternatives, which is why knowing how to cook from scratch is so important. Processed foods are more expensive and have fewer options. However, if that’s all your family eats, go ahead and stock up! Be aware that processed foods are in low supply at the moment, so basic components may be cheaper and easier to come by.
- Seeds
- Growing your own food is a great way to guarantee you have enough to eat. Gardening takes planning, effort, and hard work, but there’s nothing more delicious or rewarding than eating something you’ve grown yourself. If you’re thinking of starting a garden this year, get your seeds now to avoid the spring rush. To get started, look for videos, books, or local classes to assist you learn about gardening. These suggestions from an expert gardener will also be beneficial.
Buy Extra of the Items You Use Everyday
You may also want to stock up on over-the-counter medicines, vitamin supplements, and immune boosters in case another Covid outbreak occurs. Shortages of pain relievers and flu drugs continue to occur at the onset of each covid wave, which is both predictable and inconvenient.
How can you keep your money safe from inflation?
Inflation may have dropped in recent months, but savers still have a fight on their hands if they wish to avoid its corrosive effects.
We’ll look at how taking certain risks with your money can help you keep your money’s value above inflation.
Shift longer term savings into equities
You might have some money in a savings account. After all, it’s recommended that you save away roughly six months’ worth of earnings as an emergency fund. However, you may discover that you have more than you require. If that’s the case, think about putting some of it into investments that have a better chance of long-term growth.
Equities have historically been the most successful assets for fighting inflation over the long term but you must be comfortable with your investments rising and falling in value.
Choose your investments wisely
Other investments, if you know where to search, can produce returns that are higher than inflation. Bond funds, for example, could be included in a portfolio of investments because they invest in debt issued by governments and/or enterprises seeking to raise financing. Throughout their lives, bonds pay a defined rate of interest, known as the coupon, and should refund the original capital at maturity. To spread risk, bond funds invest in a variety of debt instruments.
A financial adviser can help you create a portfolio that takes advantage of all available investment opportunities.
Maximise tax efficiency
After you’ve figured out how to fight inflation, think about how tax-efficient your assets are. ISAs and pensions are both tax-advantaged vehicles for saving and investing for the long term.
ISAs allow you to save up to 20,000 a year in tax-free growth and income on investments, as well as tax-free withdrawals. Meanwhile, depending on your taxable income, pension payments may be eligible for income tax relief of up to 45 percent.
When you can afford it and while they’re still accessible, it’s a good idea to take advantage of hefty tax breaks over time. This way, you may take advantage of compound growth or earning returns on your returns to help you keep up with inflation.
Seek expert advice
A sound investment strategy should include a diverse portfolio of assets and the use of tax-advantaged investment vehicles.
We can put together a diversified portfolio that is geared to your long-term financial goals, risk tolerance, and inflation protection. Get in contact with us right now to learn more.