If you’ve been following my blogs, you’ll know that I’ve been sounding the alarm on inflation for a while. Last year, Wall Street and our policymakers wanted to assure us that everything was under control and that inflation wouldn’t get out of hand.
A little over a year ago, when I started making noise about inflation, inflation was a gathering storm off of the horizon.
With last week’s news, inflation is no longer a gathering storm off in the distance but a full-on category four hurricanes knocking on our doorsteps. Act before it’s too late and inflation becomes a full-on category five hurricane making landfall.
U.S. consumer prices jumped 6.2% in October, the biggest inflation surge in more than 30 years.
That was the headline on cnbc.com last Wednesday.
Typically, in the face of inflation, the Fed will increase rates to slow inflation. However, the current situation is unique, and it’s still to be seen what the Fed’s next move is.
In any other year, inflation typically signals a red hot economy with people fully employed and businesses humming from consumer demand because of extra money in people’s pockets. The problem is, this time, inflation is the result of trillions of stimulus money pumped into the economy without any underlying solid economic indicators. Unemployment is still high and hasn’t returned to pre-COVID levels.
When the Fed raises interest rates and increases the cost of borrowing, businesses and consumers will cut back spending, which will hit corporate bottom lines and drag share prices and the stock market.
In the typical inflationary environment, a strong economy would be able to survive a temporary pullback. This economy is not strong, and the Fed runs the risk of throwing the economy into a full-on recession.
So What Do We Know?
We know that high prices aren’t going away anytime soon. We also know that if the Fed raises interest rates, we may face an economic downturn.
So What To Do?
How do you protect your money and your portfolio in this established inflationary environment and possibly a recessionary one as well?
Well, hiding away your money is the last thing you want to do. Inflation will eat anything you put under the mattress or in a low-yield investment like savings accounts, CDs, money market accounts, or treasuries.
The key to surviving inflation is to have your capital in an asset that grows with inflation. What type of assets will increase with inflation? Well, the Labor Department gave us all a clue last week when it reported inflation numbers.
The Labor Department reported that the consumer price index surged 6.2% from a year ago in October, the most since December 1990.
What categories led to this price surge? According to the Labor Department, food, shelter, energy, and vehicle costs led to the gains. In other words, the price of essential goods like food, shelter, fuel, and transportation rose faster than any other category.
Doesn’t it make sense that if the price of essential commodities rose faster than any other category, investments in those essential commodities would keep pace with inflation and protect your portfolio?
The key to countering the effects of runaway inflation is to invest in commodities in the thick of runaway prices. We’ve been hearing about record real estate price increases.
Why not latch onto this phenomenon to insulate your portfolio with rents and underlying values that keep pace with inflation?
Don’t run from inflation and hide your capital where it will be eroded by inflation. The key to fighting inflation is facing it head-on, leveraging it, and using it to your advantage.
What does the 1% do to counter inflation? They snatch up assets with cash flow and appreciation that keeps pace with inflation. At the very least, this strategy will maintain their status quo while they ride out the storm.
It is not too late to respond to inflation.
Don’t wait for inflation to hit category five before taking shelter. Take shelter now with cash flowing essential assets like real estate.