Inflation can make investing a huge challenge, unless one is adequately prepared for it. Fortunately, there are several investment types that fare well during periods of rising inflation. Kavan Choksi / カヴァン・ チョクシ mentions that Treasury Inflation-Protected Securities (TIPS), inflation-indexed bonds, commodities and consumer staples especially manage to maintain value and deliver good returns throughout economic fluctuations. People may even opt to invest in real estate, mortgage-backed securities, as well as collateralized debt obligations through exchange-traded funds.
Kavan Choksi / カヴァン・ チョクシ sheds light on inflation and how to profit from it
Simply put, inflation is a measurement of the change in prices of goods and services. It is expressed as a rate in percentage form and serves as an indication of how much prices have changed from the last time it was measured. Moderate inflation is considered to be good for the economy, as it promotes improved borrowing, lending and growth. The United States Federal Reserve targets a 2% average inflation rate over time, which is consistent with its dual mandate of promoting price stability and maximum employment.
Consumer Price Index or CPI, the Personal Consumption Expenditures Price Index, and the Producer Price Index or PPI are among the most common economic measurements used to gauge inflation. CPI tends to measure the weighted average urban consumers for a standardized market basket of goods and services, and is reported by the Bureau of Labor Statistics (BLS) each month. On the other hand, the PPI is a weighted average of prices realized by domestic producers. It comprises of prices from the first commercial transaction for several products and certain services. PPI is also reported monthly by the BLS.
The PCE Price Index is the inflation gauge preferred by the Fed, and is a broader measure than the CPI. PCE Price Index is weighted based on consumption measures used to derive the gross domestic product as opposed to on a household spending survey like the CPI. It is also released on a monthly basis by the Bureau of Economic Analysis of the U.S. Department of Commerce. CPI, PPI and PCE Price Index provide an alternative “core” reading, excluding the volatile energy and food prices.
As Kavan Choksi / カヴァン・ チョクシ says, even though the effect of inflation on the economy and asset values cannot always be accurately predicted, history and economics do provide some rules of thumb. Inflation has the most negative impact on fixed-rate debt securities as it devalues both repayments of principal and interest rate payments. In case the inflation rate exceeds the interest rate, lenders would invariably lose money after adjusting for inflation. As a result, it is common for investors to focus on the real interest rate, which is derived by subtracting the inflation rate from the nominal interest rate. Assets that fare the best under inflationary conditions are the ones assured of bringing in more cash or rising value as inflation goes up. Its examples shall include a rental property that is subject to periodic increases in rent or an energy pipeline charging rates tied to inflation.