Gold has long been thought to be a good inflation hedge. In reality, many people have looked to gold as a “alternative currency,” especially in countries where the national currency is depreciating. When their own currency fails, these countries often resort to gold or other strong currencies. Gold is a genuine, tangible asset that, for the most part, holds its worth.
What investments do well in the face of inflation?
- In the past, tangible assets such as real estate and commodities were seen to be inflation hedges.
- Certain sector stocks, inflation-indexed bonds, and securitized debt are examples of specialty securities that can keep a portfolio’s buying power.
- Direct and indirect investments in inflation-sensitive investments are available in a variety of ways.
What is the best ETF for inflation protection?
Oil Fund for 12 Months in the United States (USL) No K-1 ETF from Invesco Optimum Yield Diversified Commodity Strategy (PDBC) Vanguard Real Estate ETF is a mutual fund that invests in real estate (VNQ) TIPS Bond ETF (iShares) (TIP)
What do you do with cash when prices rise?
Maintaining cash in a CD or savings account is akin to keeping money in short-term bonds. Your funds are secure and easily accessible.
In addition, if rising inflation leads to increased interest rates, short-term bonds will fare better than long-term bonds. As a result, Lassus advises sticking to short- to intermediate-term bonds and avoiding anything long-term focused.
“Make sure your bonds or bond funds are shorter term,” she advises, “since they will be less affected if interest rates rise quickly.”
“Short-term bonds can also be reinvested at greater interest rates as they mature,” Arnott says.
Who is the hardest hit by inflation?
Inflation is defined as a steady increase in the price level. Inflation means that money loses its purchasing power and can buy fewer products than before.
- Inflation will assist people with huge debts, making it simpler to repay their debts as prices rise.
Losers from inflation
Savers. Historically, savers have lost money due to inflation. When prices rise, money loses its worth, and savings lose their true value. People who had saved their entire lives, for example, could have the value of their savings wiped out during periods of hyperinflation since their savings became effectively useless at higher prices.
Inflation and Savings
This graph depicts a US Dollar’s purchasing power. The worth of a dollar decreases during periods of increased inflation, such as 1945-46 and the mid-1970s. Between 1940 and 1982, the value of one dollar plummeted by 85 percent, from 700 to 100.
- If a saver can earn an interest rate higher than the rate of inflation, they will be protected against inflation. If, for example, inflation is 5% and banks offer a 7% interest rate, those who save in a bank will nevertheless see a real increase in the value of their funds.
If we have both high inflation and low interest rates, savers are far more likely to lose money. In the aftermath of the 2008 credit crisis, for example, inflation soared to 5% (owing to cost-push reasons), while interest rates were slashed to 0.5 percent. As a result, savers lost money at this time.
Workers with fixed-wage contracts are another group that could be harmed by inflation. Assume that workers’ wages are frozen and that inflation is 5%. It means their salaries will buy 5% less at the end of the year than they did at the beginning.
CPI inflation was higher than nominal wage increases from 2008 to 2014, resulting in a real wage drop.
Despite the fact that inflation was modest (by UK historical norms), many workers saw their real pay decline.
- Workers in non-unionized jobs may be particularly harmed by inflation since they have less negotiating leverage to seek higher nominal salaries to keep up with growing inflation.
- Those who are close to poverty will be harmed the most during this era of negative real wages. Higher-income people will be able to absorb a drop in real wages. Even a small increase in pricing might make purchasing products and services more challenging. Food banks were used more frequently in the UK from 2009 to 2017.
- Inflation in the UK was over 20% in the 1970s, yet salaries climbed to keep up with growing inflation, thus workers continued to see real wage increases. In fact, in the 1970s, growing salaries were a source of inflation.
Inflationary pressures may prompt the government or central bank to raise interest rates. A higher borrowing rate will result as a result of this. As a result, homeowners with variable mortgage rates may notice considerable increases in their monthly payments.
The UK underwent an economic boom in the late 1980s, with high growth but close to 10% inflation; as a result of the overheating economy, the government hiked interest rates. This resulted in a sharp increase in mortgage rates, which was generally unanticipated. Many homeowners were unable to afford increasing mortgage payments and hence defaulted on their obligations.
Indirectly, rising inflation in the 1980s increased mortgage payments, causing many people to lose their homes.
- Higher inflation, on the other hand, does not always imply higher interest rates. There was cost-push inflation following the 2008 recession, but the Bank of England did not raise interest rates (they felt inflation would be temporary). As a result, mortgage holders witnessed lower variable rates and lower mortgage payments as a percentage of income.
Inflation that is both high and fluctuating generates anxiety for consumers, banks, and businesses. There is a reluctance to invest, which could result in poorer economic growth and fewer job opportunities. As a result, increased inflation is linked to a decline in economic prospects over time.
If UK inflation is higher than that of our competitors, UK goods would become less competitive, and exporters will see a drop in demand and find it difficult to sell their products.
Winners from inflation
Inflationary pressures might make it easier to repay outstanding debt. Businesses will be able to raise consumer prices and utilize the additional cash to pay off debts.
- However, if a bank borrowed money from a bank at a variable mortgage rate. If inflation rises and the bank raises interest rates, the cost of debt repayments will climb.
Inflation can make it easier for the government to pay off its debt in real terms (public debt as a percent of GDP)
This is especially true if inflation exceeds expectations. Because markets predicted low inflation in the 1960s, the government was able to sell government bonds at cheap interest rates. Inflation was higher than projected in the 1970s and higher than the yield on a government bond. As a result, bondholders experienced a decrease in the real value of their bonds, while the government saw a reduction in the real value of its debt.
In the 1970s, unexpected inflation (due to an oil price shock) aided in the reduction of government debt burdens in a number of countries, including the United States.
The nominal value of government debt increased between 1945 and 1991, although inflation and economic growth caused the national debt to shrink as a percentage of GDP.
Those with savings may notice a quick drop in the real worth of their savings during a period of hyperinflation. Those who own actual assets, on the other hand, are usually safe. Land, factories, and machines, for example, will keep their value.
During instances of hyperinflation, demand for assets such as gold and silver often increases. Because gold cannot be printed, it cannot be subjected to the same inflationary forces as paper money.
However, it is important to remember that purchasing gold during a period of inflation does not ensure an increase in real value. This is due to the fact that the price of gold is susceptible to speculative pressures. The price of gold, for example, peaked in 1980 and then plummeted.
Holding gold, on the other hand, is a method to secure genuine wealth in a way that money cannot.
Bank profit margins tend to expand during periods of negative real interest rates. Lending rates are greater than saving rates, with base rates near zero and very low savings rates.
Anecdotal evidence
Germany’s inflation rate reached astronomical levels between 1922 and 1924, making it a good illustration of high inflation.
Middle-class workers who had put a lifetime’s earnings into their pension fund discovered that it was useless in 1924. One middle-class clerk cashed his retirement fund and used money to buy a cup of coffee after working for 40 years.
Fear, uncertainty, and bewilderment arose as a result of the hyperinflation. People reacted by attempting to purchase anything physical such as buttons or cloth that might carry more worth than money.
However, not everyone was affected in the same way. Farmers fared handsomely as food prices continued to increase. Due to inflation, which reduced the real worth of debt, businesses that had borrowed huge sums realized that their debts had practically vanished. These companies could take over companies that had gone out of business due to inflationary costs.
Inflation this high can cause enormous resentment since it appears to be an unfair means to allocate wealth from savers to borrowers.
How will you protect yourself from inflation in 2022?
During inflationary periods, stocks are often a safe refuge. This is because stocks have typically produced total returns that have outperformed inflation. And certain stocks outperform others when it comes to combating inflation. Many recommended lists for 2022 include small-cap, dividend growth, consumer products, financial, energy, and emerging markets stocks. Industries that are recovering from the pandemic, such as tourism, leisure, and hospitality, are also receiving a thumbs up.
Another tried-and-true inflation hedge is real estate. For the year 2022, residential real estate is considered as a safe haven. Building supplies and home construction are likewise being advocated as inflation-busters. REITs, or publicly traded organizations that own real estate or mortgages, provide a means to invest in real estate without actually purchasing properties.
Commodity investments could be one of the most effective inflation hedges. Agriculture products and raw resources can be exchanged like securities. Gold, oil, natural gas, grain, meat, and coffee are just a few of the commodities that traders buy and sell. Using futures contracts and exchange-traded funds, investors can allocate a portion of their portfolios towards commodities.
During inflationary periods, bonds are often unpopular investments since the return does not keep pace with the loss of purchasing power. Treasury inflation-protected securities are a common exception (TIPS). As the CPI rises, the value of these government-backed bonds rises, removing the danger of inflation.
TIPS prices rose dramatically in tandem with inflation expectations in 2021. To put it another way, these inflation hedges are no longer as appealing as they were a year ago. Savings bonds, which the US Treasury offers directly to investors, are attracting some inflation-avoiders.
How can I keep my investments safe from UK 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.
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.
How can you keep inflation at bay?
- Governments can fight inflation by imposing wage and price limits, but this can lead to a recession and job losses.
- Governments can also use a contractionary monetary policy to combat inflation by limiting the money supply in an economy by raising interest rates and lowering bond prices.
- Another measure used by governments to limit inflation is reserve requirements, which are the amounts of money banks are legally required to have on hand to cover withdrawals.