How to Profit From Inflation
And here’s the thing, we don’t know when the rise in prices of goods and services will stop. So, how can you react financially? As a consumer, you respond by avoiding making big-ticket purchases like a car or a tv. However, as an investor, you’re more focused on how to avoid losing money in the market.
- Many asset classes perform well during periods of inflation; leave the decision-making to the BOTS app
- There are three main ways to track inflation: CPI, PCE, and PPI
- Tangible assets, including real estate and commodities, have been historically considered hedges
What is inflation?
If you know what inflation is, skip this part and keep reading. But if you’d like a refresher, let’s do a quick rundown on inflation. Inflation is when there’s an increase in the prices of goods and services. While inflation around 2% is a positive sign of growth and is encouraged by countries, once it passes that threshold, it can damage the economy by decreasing consumer buying power.
How to track inflation
Understanding how to track inflation can help you make better investment decisions. The most common way economic reports measure inflation is via Consumer Price Index (CPI), the Personal Consumption Expenditures Price Index (PCE), and the Producer Price Index (PPI). So how do these methods differ?
- Consumer Price Index (CPI): measures the average change in prices paid by consumers for a market basket of consumer goods and services.
- Personal Consumption Expenditures Price Index (PCE): measures the prices that people living in the US pay for goods and services.
- Producer Price Index (PPI): measures the average change over time in the selling prices received by domestic producers for their output.
How inflation affects asset values
While we wish there was a one-size-fits-all answer to how inflation affects asset values, it can be unpredictable. However, we can use our past economic history to measure what will happen during this period of inflation. Let’s look at which assets perform well under inflation and which assets it’s best to avoid.
It’s important to note that many investments have historically been considered hedges (protection) against inflation. These hedges include commodities, real estate, and specific stocks and bonds.
#1 Real Estate
Real estate is a popular asset to invest in as it can store value during inflation while generating income through rent. During inflation in the 1970s, real estate fared very well. However, rising interest rates, such as the ones in 2007-2008, can create vulnerability in the market.
Cryptocurrency is not like fiat currency, meaning it doesn’t respond to inflation the same way a foreign currency would. Because of this, cryptocurrency can act as a counter-inflationary asset. Investors may want their cash in Bitcoin or other cryptocurrencies to preserve their spending power. Investing in crypto has also become easier with trading platforms like BOTS.
Download the BOTS app if you don’t already have it.
When inflation increases, investors usually center their focus on tangible assets that will potentially increase in value, such as gold, precious metals, agricultural products, and raw materials.
Many people may see investing in bonds as counterintuitive, as inflation is known to damage fixed-rate debt. However, inflation-indexed bonds offer a variable interest rate connected to the inflation rate.
Stocks have been historically known to keep up with inflation, but not all stocks respond equally. Investors interested in stocks should pay attention to companies that can shift the rising costs to consumers.
Depending on the type of loan, it interacts with inflation differently. For example, leveraged loans fare well during inflation as the banks can raise the interest rate charged to ensure the return on investment (ROI) keeps up with inflation.
Pros and cons of investing for inflations
There are always pros and cons to investing during inflation; let’s take a look at them now.
- Diversify portfolio
- Preserve buying power
- Protect current portfolio
- Overweight portfolio in some asset classes
- Increase exposure to risk
Final thoughts on how to profit from inflation
While consumers tend to stop spending during inflation, as an investor, this could be a great opportunity to preserve your buying power and protect your portfolio. Investing in the right asset classes can diversify your portfolio and beat inflation.
This blog is for educational purposes only. The information we offer does not constitute investment advice. Please always do your own research before investing.
Any views expressed in this blog and by BOTS do not constitute a recommendation that any particular cryptocurrency (or cryptocurrency token/asset/index), portfolio of cryptocurrencies, transaction, or investment strategy is suitable for any specific person.