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Managing your finances can be challenging during a period of high inflation. Prices of goods and services skyrocket, so people tend to spend more than they can afford.
If you have bought a house, car, groceries, or anything else since mid-2021, you must have realized that the prices of commodities keep going up. But on a positive note, IMF global inflation estimates indicate that the inflation rate may come down to 6.6% in 2023 from a high of 9.1% in June 2022. However, some experts are skeptical because the factors contributing to high inflation are still at play.
During times of inflation, deciding where to invest can be challenging. Most people usually decry the high cost of living and companies’ little profit margins. But do you know that you can still invest and make money even during inflation? In this article, I will discuss profitable investment opportunities during inflation. But first, let’s understand what causes inflation.
What is Inflation, and What Causes It?
Inflation refers to an increase in the prices of goods and services over a given period. Basically, inflation results from an increase in demand or the cost of production. Here are two types of inflation:
- Cost-push inflation- It occurs when production costs, like the cost of raw materials and wages, increase.
- Demand-pull inflation– It happens when there is huge consumer demand for products and services.
- Built-in inflation– This happens when employees ask for an increase in their salaries during cost-pull inflation and cost-push inflation to keep up with the cost of living.
Where to Invest During Inflation
Real estate is one of the best investments during inflation because as prices of goods and services increase, the value of real estate also increases. This means landlords can charge more for rent while earning more from selling houses.
You can invest in real estate by buying rental properties or Real Estate Investment Trusts (REITs). REITs allow you to invest without owning physical property, and you can earn a steady income stream through dividends.
During inflation, the prices of commodities tend to rise as the cost of production increases. This can present a unique opportunity when handled correctly. The key to investing in commodities is timing because the price of commodities is determined by supply and demand, and the need can shift at any moment.
For example, oil prices have risen since the Russian invasion of Ukraine. People who were smart enough to invest in oil before prices hiking are now making enormous profits.
You can invest in commodities through ETFs, mutual funds, or physical assets such as gold, silver coins, oil, or wheat.
While stocks can be risky during inflation, specific sectors tend to perform well. These include companies in the energy, utilities, and materials sectors. These companies provide essential goods and services, meaning demand for their products remains steady even during inflation.
Additionally, companies with pricing power, or the ability to raise prices, tend to perform well during inflation. An excellent example are tech companies with a strong market position.
You can also invest in a stock index fund available as a mutual fund or exchange-traded funds (EFTs) and follow a specific index like S&P 500. The money you use to purchase your index fund is invested in all the companies involved with that particular index.
Treasury Inflation-Protected Securities (TIPS)
TIPS are bonds issued by the US Treasury to protect investors against inflation. These bonds are indexed to inflation, meaning the principal and interest payments increase with inflation. TIPS provide a guaranteed return adjusted for inflation, making them a safe investment in an inflationary environment. You can buy TIPS directly from the US Treasury or through a broker.
Cryptocurrencies, such as Bitcoin and Ethereum, have gained popularity as an inflation hedge. Unlike traditional currencies, cryptocurrencies are not backed by a central bank or government. Therefore, their value is not affected by inflation. Additionally, some cryptocurrencies have a finite supply, meaning they cannot be devalued through inflation.
However, cryptocurrencies can be highly volatile, so you should approach them cautiously.
Although investing during inflation can be challenging, it presents opportunities for savvy investors. Real estate, commodities, stocks, TIPS, and cryptocurrencies are all investments that can shield you against inflation. It’s important to remember that no investment is entirely risk-free, the reason it is always important to do due diligence before investing in anything.
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