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How to Fight Inflation

What is Inflation?

Inflation is the rate at which your money loses value. When you have positive inflation, the same goods and services costs more in subsequent years due to falling purchasing power. The inflation rate is dictated by the interest rates set by the central bank of the country.

Why Address Inflation?

Every investor needs to address the issue of inflation when dealing with returns. If your investment returns do not beat inflation, then, the investment has actually lost value over the time. A little bit of inflation is desirable by the government since it keeps the money moving and the economy growing. The inflation rates for United States and Canada are shown in the charts (source: inflation.eu).

As you can see from the chart, we are currently at extremely low levels of inflation, historically speaking. Another way to look at this is that we also have the potential of higher inflation in the future.

How to Fight Inflation?

There are a few investments that are good at combating inflation, simply due to their nature. The best inflation hedges are:

  1. Inflation Indexed Bonds: These are bonds that are tied to a country's inflation index. They go by different names in different countries. In Canada, they are called Real Return Bond and in the United States they called Treasury Inflation Protected Securities, or TIPS for short.
  2. Commodities: Commodities are generally a good hedge for inflation protection.
    • Gold is considered one of the best inflation hedges.
    • Oil can also be a good hedge against inflation.
    • Food products - food prices are one of the quickest responses that companies can manipulate in case of higher inflation.
    • Everyday consumer staple items such as toothpaste, razors etc.
  3. Real Estate: This could be either in the form of your personal home value or owning REITs to get real estate exposure.

My Portfolio Holdings

  1. I do not own any Inflation-Indexed bonds.
  2. Commodities exposure:
    • Gold: I own IAMGold (TSE: IMG, NYSE: IAG), a gold mining company instead of owning gold bullion.
    • Oil: I own Chevron (CVX) and Kinder Morgan Inc (KMI) instead of holding/trading oil futures contracts.
    • Food related: I own agriculture/farming related companies/organizations such as Archer Daniels Midland (ADM) and CHS Inc (CHSCP).
  3. I own REITs which can quickly raise their rent in case of high inflation. I own Realty Income Corp (O), RioCan REIT (REI.UN) and Omega Healthcare Investors Inc (OHI).

Full Disclosure: Long all stocks mentioned above.

About the author:

Roadmap2Retire
I am a personal finance and investing blogger. A software designer by profession, I have a passion for economics, business, finance and investing. My personal financial goals are to generate enough passive income to fund my retirement, and along the journey - share my experiences with my readers.

Visit Roadmap2Retire's Website


Rating: 3.0/5 (3 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 9 months ago

Years ago here, I suggested that if inflation becomes a concern, you'd want to own the credit card companies. People will seek to buy now rather than wait. As for staples, I would also suggest looking out 5 - 10 years and deciding what you plan to own or consume and if possible, consider buying it much sooner. (It might even pay to buy assets like a second lawn mower, a lot for your next house, etc.)

In inflation it would seem that pricing power is the key. As such, I would expect that with commodities, like gold and oil inflationary prtection is fleeting. Once inflation takes hold most commodities quickly loose their advantage as producers with capital flooding in, quickly move their sector to a state of overproduction and shortly thereafter falling prices.

Oil and gold are only rare in the sense that at current prices, with current production technologies and current capital, the current production is at its maximum. Producers produce and constantly work to expand production and cut costs. Having spent my life in Alberta I have yet to see any significant locking in of resources for higher future prices. Even governments fail to restrict development, choosing job growth over future returns. If inflation takes hold watch the capital and then the oil and gold flow. As always, the lowest cost producer wins.

REITS. That's a good one for debate. Their leverage subjects them to rising interest rates. How have they performed throughout past inflationary periods?

Roadmap2Retire
Roadmap2Retire - 9 months ago

Thanks for the comment, Albertya Sunwapta.

Credit card companies and staples are good options as investors. You are right when you say that the pricing power is key. Especially, for brand name staples - if they cannot compete with the unknown brands, then they might lose the squeezed customers.

The producers will keep producing and always looking for lower costs - theres no end to that. It just becomes a matter of "is it worth it" as we saw with the oil prices. The discovery of tar sands was done long ago, but the oil market prices of the previous generations didnt justify pulling it out. Now that the oil prices are closer to $100, it is worthwhile.

regards

R2R

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