Inflation is the eternal enemy of one’s investments. One of the two mandates of the Federal Reserve is to keep inflation under control, which the Fed has generally done over the years with exception of the 1970s and the economic crisis caused by the Covid pandemic. Beyond the control of the Fed is an aging population caused a low birth rate and aging baby boomers. This demographic is likely to drive inflation that will difficult if not impossible for the Fed and other central banks to control. Which brings up the issue of how should you invest as inflation exceeds current expectations?
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How Inflation Affects Your Investments
While money invested in US Treasuries, bonds, or CDs at your bank pay interest over the years the interest rate you receive needs to be higher than the rate of inflation. If it is not the purchasing power of you money steadily shrinks. The same issue affects your turn on investment in real estate or the stock market. Choosing your investments wisely helps you keep ahead of inflation and the success of the Federal Reserve and other major Central Banks in controlling inflation is a key issue affecting your financial future.
Controllable Inflation of the 1980s and 1990s Is Not Likely to Continue
Bloomberg published an insightful article tied to the last days of Jerome Powell as chairman of the Federal Reserve. The Fed has successfully used interest rate adjustments to help control inflation since the early 1980s. The point made in the article is that at least the first two decades of that era were a demographic “sweet spot.” When an economy has lots of workers compared to dependents this tends to reduce inflation and give its currency more buying power. That “sweet spot” is disappearing as more boomers retire and become dependents and immigration, which benefitted both the US and Europe, is dwindling due to social issues. Retirees create demand while workers save part of their salary and are always paid less than the total value of goods and services that they produce.
Investing for an Inflationary Demographic Sour Spot
The Bloomberg article cites economists who contend that we are seeing a demographic reversal that will result in an inflationary “sour spot.” How can investor deal with persistent inflation that the Fed and other central banks will find hard to control? Blindly following the market may work in the short but generally it is not helpful for long term investing. Investing driven by analysis of fundamentals and use of long term intrinsic value of what you invest in is a better choice in our opinion. If you want to stick with government secured investment vehicles, TIPS or treasury inflation-protected securities have interest rates that are linked to indices of inflation. Because real estate value tends to climb during periods of inflation, REITS or real estate investment trusts are another promising option.
Investing in Commodities to Stay Ahead of Inflation
During the inflationary 1970s folks who invested early in gold made out exceptionally well. However, folks who bought just before the peak in the early 1980s almost immediately as much as half of their dollar value and did not see a recovery until the low interest rates of the beginning of this century. Other precious metals are also options but you need to be able to safely store your gold, bullion, silver, etc. While you can make money trading commodities live cattle, coffee, oil, etc. are not assets that you can hold over longer periods of time.
Value Stocks As a Long Term Inflationary Hedge
Stocks in general do not necessarily do well during surges of inflation. However, companies that have pricing power, sell goods and services that are not harmed by inflation like consumer goods, electric power, or even beer distributors can often survive and prosper even as inflation takes its toll on other companies and the economy as a whole.