It’s no longer news that the value of the dollar has been on a decrease since the 1970s. One of the major factors that is responsible for this decline is inflation. This article will be discussing how you can protect yourself against the rising inflation in North America.
Because of this depreciation caused by inflation, it is no longer smart for people to save money. It is a smarter move to invest your money since invested money appreciates faster than inflation erodes the value of the dollar.
However, before we get into that, we will first define inflation, and see how it erodes the value of the dollar.
Are you ready?
What is inflation?
Inflation is the decline of the purchasing power of a currency, such as a dollar, over some time. Such that a higher amount of that currency is required to buy what a lower amount would have paid for a few years before.
For instance, an average movie ticket sold for about $3 in 1980. However, you would need about $9 to pay for the same ticket today. A loaf of bread that sold for $5 in 1997, will go for about $9.60 today.
These examples emphasize the fact that the purchasing power of the dollar has been on a gradual decline.
However, it is important to note that inflation does not refer to the rise in the price of just a particular commodity. Rather, it refers to the increase in the price of goods or services across the industry.
For instance, a general increase in the cost of new cars, new electronics, etc.
The major yardsticks for measuring inflation in the United States of America are the Consumer Price Index (CPI), the Personal Consumption Expenditures Price Index, and the Producer Price Index.
These are used to track the change in prices consumers pay and producers receive for their goods and services, across the various industries in the US Economy.
At face value, inflation seems like an evil monster that must be eradicated by all means. However, economists have argued that a small amount of inflation is healthy for an economy!
According to them, moderate inflation will urge people to spend or invest their money in the economy, rather than stashing it at home where it will diminish in value.
However, inflation becomes dangerous when it is allowed to rise uncontrolled. It can quickly erode the value of a currency and jeopardize the economy of that country.
Causes of Inflation
Like most challenges have causes, inflation is caused by two factors. These two factors are associated with the market forces of demand and supply. They are as follow:
Demand-pull inflation happens when the demand for goods and services increases without a corresponding increase in supply. This will lead to competition for the available goods and services, which will, in turn, lead to an increase in their prices.
This type of inflation is called Demand-pull inflation.
One way this happens is when an economy is stable, and people become prosperous. They are now able to buy more goods and services than they were able to before.
If there is no corresponding increase in the production of goods and services, this will lead to competition for the available commodities that will in turn drive prices higher.
Demand-pull inflation can also happen when a product suddenly becomes very popular and every person wants to get their hands on it. If the supply of the product is not above the demand, there is sure to be inflation.
Cost Pust inflation
Cost-Push inflation happens when the supply of goods and services is lesser than the demand for them.
This is different from demand-pull inflation in that, the demand for the goods and services does not increase, however, the supply is limited or reduced, leading to competition, which will, in turn, lead to inflation.
A common example of this type of inflation is when oil-producing countries under OPEC (Organization of Petroleum Exporting Countries), decide to cut down their oil production.
This sudden reduction will lead to scarcity of petroleum products, which will, in turn, lead to competition in the market for the available products. This competition will lead to an increase in price.
How To Protect Yourself Against Rising Inflation in North America?
How then can one protect himself from rising prices in North America?
The answer is quite simple – via investments!
In this section, we will be discussing the investment vehicles that are best to protect your money from inflation.
Invest in Stocks
One smart investment strategy to hedge against inflations is investing in the Stock Market.
Although inflation affects some other investments like Bonds, it is a boost for the stock market, as it is a time when companies are either making money or are seeking to boost their production to meet up with increased demand.
Either way, you win when you invest in the stock market in times of inflation.
As you invest in the stock market, ensure to prioritize investing in preferred stocks as this type of shares will ensure you enjoy a higher claim to the dividend of the organization.
What’s more, during times of inflation, organizations in an industry witnessing rising prices may post higher profits (if they are in the essential goods or service industry).
With higher profits being recorded, you are sure to enjoy nice dividends as the owner of preferred stock.
Finally, another industry to buy stocks from in times of inflation is the utility industry. The demand for their services is inelastic. It does not change, regardless of the economic condition. So, you can rest assured that your investment will do well.
Invest in Other Stock Markets
There are several stable economies around the world that do not react directly to the fluctuations in the American stock market. Investing in such economies during times of inflation may be a good move to hedge against inflation.
Examples of countries with such economies include Australia, South Korea, etc.
Owning the stock from such economies in your portfolio can help you hedge against the effects of domestic inflation.
Another effective way to hedge against inflation in North America is by investing in Real Estate.
You can do this by investing in a Real Estate Investment Trust (REIT).
What does this mean?
A real estate investment trust is a company that makes investments in income-producing real estate. Investors who wish to gain exposure to the benefits of owning real estate can buy shares from this kind of company.
Investing in a REIT means that an investor gets to enjoy some of the benefits of owning the real estate owned by the REIT.
REITs also offer investors higher returns than bonds (dividends), because of the rents and lease payments they receive periodically, from their properties.
Another benefit of investing in REITs is their prices experience less fluctuation, as they are not affected when rates rise, since their operating costs are largely stable.
Consider investing in Treasury Inflation-Protected Securities (TIPS)
What is Treasury Inflation-Protected Securities (TIPS)?
They are a form of treasury security indexed to inflation to protect investors from a decline in the purchasing power of their funds. How does this happen?
TIPS are linked to the consumer price index, and so their principal amount is adjusted according to changes in this index.
The purpose of this is to ensure that money invested in it maintains the initial market value it had when it was invested.
TIPS are issued by the United States Government.
Invest in Senior Security
Another smart way to hedge against inflation is to invest in Senior loans, as their returns are higher than the eroding force of inflation.
What is Senior security?
Senior securities are debts that rank highest in the order of repayment, among the liabilities of an organization.
In the event that the organization goes bankrupt, these sets of liabilities are to be paid first from the sale of an organization’s assets before any other liability is repaid.
How does Senior security hedge against inflation?
The prices of these securities rise with the current market rates, thereby ensuring that their value is not eroded by inflation.
Investopedia suggests The Lord Abbett Floating Rate Fund (LFRAX) as a great investment vehicle for those interested in this type of investment.
Invest in Gold
One commodity that has been touted as a good hedge against inflation over the years in North America, is Gold. This is because, unlike the dollar and other paper currency, it has intrinsic value.
The value or price of Gold has increased over the years, to catch up with and even remain paces ahead of the rate of inflation. For instance, an ounce of gold sold at $44.60 in 1971, but sold at $1,769.24, in June 2021.
So, buying gold works as a hedge against inflation.
However, buying up physical gold is not the best possible way to enjoy hedge against inflation.
Investing in gold ETFs will yield better returns than buying up physical gold, as their value reflects the gains made in the real gold market.
What’s more, gold ETFs pay dividends to their holders.
So, you get to enjoy the full protection of your assets from the effects of inflation, while also receiving dividends.
Invest in the Cryptocurrency market
Investing in the cryptocurrency market has been getting lots of attention in the past few years as this market has produced many millionaires from around the world.
To put it in proper perspective, as little as 5 years ago (January 11, 2016), a bitcoin sold at $752. However today, 9 July 2021, it sells at $33,438.30!
Another cryptocurrency that has been of interest to many investors is Ethereum (also known as Ether). It has also enjoyed a substantial increase in value since its launch date.
The list of cryptocurrencies performing fairly in the crypto market goes on and on.
Investing in Cryptocurrency can multiply the value of your principal, so much so that it exceeds the rate of inflation. Thereby protecting the value of your money from inflation.
However, the crypto market is highly volatile. The value gained by your principal can be wiped out in just a few days and leave you several points behind where you started from.
So, investing in cryptocurrency may not be the best alternative for you.
However, investing in Crypto ETFs will be a smarter move for you, as it will give you exposure to the upside of the Crypto market while reducing your losses when the market is doing poorly.
In addition, you will get to earn dividends from time to time, as your investment appreciates.
To learn more about Crypto ETFs, see our article on crypto ETF
As we conclude, the point to note here is that the surest way to hedge against inflation is to invest your money!
Several investment vehicles that can protect you from inflation have been identified here. Select the one you are most familiar or comfortable with and discuss with your broker how to proceed.
Wishing you the best as proceed to protect the value of your funds against inflation.