When prices shoot up and your paycheck doesn't stretch as far, it's easy to stress about inflation eating away at your money. Still, savvy investors can actually come out ahead during inflation by picking the right assets and strategies.

The trick is figuring out which investments usually rise with inflation and which ones get hammered by it.
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Inflation doesn't treat all investments the same. Cash and bonds often lose buying power, but assets like real estate and commodities can actually gain value as prices rise.

Back in the 1970s, real estate did especially well when inflation stayed high for years.

Key Takeaways

• Investors can profit during inflation by choosing assets that typically rise with increasing prices
• Real estate, commodities, and inflation-protected securities often outperform traditional investments when prices surge
• Knowing which investments lose value during inflation helps people skip costly mistakes

Understanding Inflation and Its Impact

Inflation eats away at money's value over time. As a result, goods and services get more expensive.

The Consumer Price Index and other tools measure these price shifts, showing how much your dollars can actually buy.

What Is Inflation and How It Is Measured

Inflation happens when prices for goods and services climb over time. Dollar Tree stores bumping prices from $1 to $1.25 is a classic example of inflation in action.

The Consumer Price Index (CPI) is the main tool for tracking inflation. It checks the prices of a basket of stuff people buy all the time.

The Producer Price Index (PPI) looks at price changes from the seller's side. It tracks what companies pay for raw materials before those goods hit the shelves.

Key inflation measurements include:

• Consumer Price Index (CPI) - Tracks retail prices consumers pay
• Producer Price Index (PPI) - Measures wholesale prices businesses pay
• Core inflation - Leaves out wild swings in food and energy prices
• Annual inflation rate - Compares prices year over year

The Federal Reserve releases these numbers monthly. They use this info to make calls about interest rates and policy.

How Inflation Affects Purchasing Power

Purchasing power is just how much stuff your money can buy. As inflation rises, your dollar doesn't go as far—it simply buys less.

If someone made $50,000 in 2020, they'd need more today to cover the same groceries, gas, and rent. Their paycheck hasn't shrunk, but it sure feels like it.

People on fixed incomes get hit the hardest. Retirees living on pensions or Social Security watch their money stretch less each year if prices rise faster than their cost-of-living adjustments.

Inflation doesn't hit every expense equally:

Wages might rise with inflation, but they're usually slow to catch up. That lag means workers lose ground until their pay finally increases.

Common Inflation Indicators

Several signals can tip you off about inflation before it hits full force. Investors and consumers watch these to brace themselves for rising prices.

When commodity prices jump—think oil, wheat, copper—it usually means inflation is coming. Companies pay more for materials and pass those costs to you.

Wage growth can also kick off inflation, especially when pay rises faster than productivity. Businesses facing higher labor costs often hike up their prices.

Some classic inflation warning signs:

• Commodity price spikes - Oil, gold, and crops getting more expensive
• Wage increases - Raises happening across the board
• Supply chain disruptions - Shortages driving up prices
• Money supply growth - More dollars chasing the same goods

Housing costs matter a lot, too. When rents and home prices climb, it hits the biggest part of most budgets.

The Federal Reserve keeps a close eye on these. They tweak interest rates to keep inflation from spiraling out of control.

Key Principles to Profit During Inflation

Smart investors stick to three big ideas during inflation: protect your buying power, diversify your portfolio, and lean on pros to help you handle the wild ride.

Preserving Wealth and Managing Risk

The first thing you want to do is protect what you've already got. Inflation chips away at your money's value, so every dollar counts less as time passes.

It's important to look at your real return—subtract inflation from your investment gains. If your stocks return 8% but inflation is at 6%, you're really only up 2%.

Managing risk matters more than ever during inflation. Fixed-rate investments like regular bonds lose value as interest rates climb. It's usually best to avoid locking into those long-term bonds during inflation.

Emergency funds need a second look, too. Keeping six months of expenses in a high-yield savings account keeps you flexible. Money market funds or short-term Treasury bills can offer better returns than a basic savings account.

Value stocks often handle inflation better than growth stocks. These companies can pass higher costs on to their customers.

If you have fixed-rate debt, inflation can actually work in your favor. You pay back loans with dollars that aren't worth as much as when you borrowed them.

Importance of Diversification

Diversification is even more crucial during inflation because different assets react in their own ways. No single investment shields you from every inflation scenario.

A balanced portfolio should blend multiple asset classes:

Real estate really shined during the 1970s inflation. Property values and rents usually rise along with prices.

Commodities like oil, copper, and crops tend to go up during inflation. You can invest in funds holding these or in companies that produce them.

International diversification is another option. Inflation hits countries at different times and rates, so foreign stocks and bonds can help balance things out.

Rebalancing your portfolio is key. As some assets outperform, your mix can get lopsided and riskier than you planned.

Role of a Financial Advisor

Having a pro in your corner helps during inflation because markets can change fast. Financial advisors can steer you away from knee-jerk reactions that hurt long-term results.

Advisors know the ropes with more complex inflation hedges like Treasury Inflation-Protected Securities (TIPS) and leveraged loans. Those tools take some know-how to use right.

They also spot sector shifts during inflation. Energy, utilities, and consumer staples can outperform, while tech and growth stocks might lag.

Tax planning gets more important, too. Taxes on inflation-fighting investments can eat into your real returns. Advisors help you figure out where to hold what, between taxable and tax-advantaged accounts.

They keep tabs on economic signals like the Consumer Price Index and Fed policy moves. That way, they can tweak your strategy before the market shifts.

Advisors help you avoid mistakes like panic selling when markets get choppy. Inflation can make things volatile, and it's tempting to bail on your plan.

They'll also help you work out what inflation means for your specific goals. Retirement planning, for instance, needs a fresh look at income needs as prices rise.

Investing in Real Estate During Inflation

Real estate investments during inflation often beat other assets since property values and rents usually rise with prices. You can profit through rental properties for steady cash flow or REITs if you want real estate exposure without the hassle of being a landlord.

Benefits of Rental Property

Rental property gives you several ways to win during inflation. Both property values and rental income usually keep up with inflation, which protects your buying power.

Cash Flow Advantages:

• Monthly rent payments rise with inflation
• Operating expenses don't always go up as fast
• Net income can grow if rents climb faster than costs

Landlords can usually bump up rent each year to match inflation. Most leases allow for increases at renewal, which helps you keep up with rising expenses.

Multi-family and commercial properties often do even better during inflation. They throw off more cash flow than single-family homes and are cheaper to manage per unit.

Property appreciation adds another layer of returns. Real estate values tend to rise when inflation pushes up construction costs. Land gets more valuable as it gets pricier to build new places.

Real Estate Investment Trusts (REITs)

REITs let you invest in real estate without owning property yourself. These companies own income-generating real estate and pay out profits as dividends.

REIT Types:

• Equity REITs - Own and run properties
• Mortgage REITs - Lend money for real estate deals
• Hybrid REITs - Do a mix of both

REITs trade like regular stocks, so you can buy or sell quickly. No waiting around for a buyer or dealing with closing paperwork.

Most REITs stick to one property type—offices, malls, apartments, warehouses—and each reacts differently to inflation. Diversified REITs spread bets across several categories.

By law, REITs have to pay out 90% of their taxable income as dividends. That means steady income for shareholders, and many REITs bump up payouts each year to keep pace with inflation.

Direct vs. Indirect Real Estate Investment

Direct real estate investment? That’s when you buy property outright and call the shots. Indirect investment means you’re going through REITs, real estate mutual funds, or maybe a partnership that owns the properties instead.

Direct Investment:

• You get full control over every property decision.
• There’s a shot at higher returns.
• You’ll spend more time and effort managing things.
• It usually takes a bigger chunk of capital up front.

Indirect Investment:

• Professionals handle the management side.
• You can get started with a lower minimum investment.
• Diversification is baked in.
• You give up some control over what happens.

With direct investment, you get a bit more insulation against inflation thanks to leverage. If you’ve got a fixed-rate mortgage, inflation kind of works in your favor—your debt shrinks in real terms while your property value climbs.
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Indirect investment makes it easier to dip your toes into real estate. REITs need less capital and you don’t have to deal with tenants or leaky roofs.

Tax perks aren’t the same for both. Direct ownership lets you deduct depreciation and other expenses, while REIT dividends get different tax treatment than rental income. You’ll want to weigh your own tax situation before picking a path.

Leveraging Commodities and Precious Metals

Commodities and precious metals give you direct exposure to stuff that often gets pricier when inflation heats up. Gold’s managed to hold its value for decades, and industrial metals or energy commodities sometimes even outpace inflation.

Gold and Other Precious Metals as Inflation Hedges

Gold really stands out as the classic inflation hedge among precious metals. Over the past 20 years, gold and other precious metals have done an admirable job protecting purchasing power and increasing in real value.

Silver offers some of the same protection, plus it’s got industrial uses that help support its price. It’s both a monetary and industrial metal, so it has a couple of things going for it when things get shaky.

Platinum and palladium are tied to the auto industry. They’re crucial for catalytic converters, and stricter emissions rules keep demand up.

Precious metals act as a shield from climbing prices because they tend to hold their value or even increase in price during inflation. You can’t just print more gold or silver, so supply stays limited.

Want exposure? You can buy physical metals, go for ETFs, or pick mining company stocks. Physical gold or silver means you’ll need to think about storage and insurance, though.

Commodity Investing Basics

Industrial metals like aluminum, copper, iron and steel offer inflation protection through commodity funds. As construction and manufacturing costs rise, these materials usually get more expensive too.

Energy commodities, like oil and natural gas, often surge when inflation picks up. During the 2021-2022 inflation spike, commodities like oil and gold experienced heightened investment interest.

Agricultural commodities can help you keep pace with food price inflation. Wheat, corn, and soybeans tend to rise when prices across the board start climbing.

Investment Methods:

• Commodity ETFs – You track commodity prices, no need to actually own the stuff.
• Futures contracts – These give you direct exposure to price swings.
• Commodity mutual funds – Someone else manages a basket of commodities for you.
• Physical ownership – You actually own the metal or agricultural product.

The easiest and least risky way to get exposure to commodities is through commodity funds. No storage headaches, and you get a mix of different commodities out of the gate.

Risks and Considerations of Commodity Investments

Commodity prices can whipsaw fast. Weather, geopolitics, or supply hiccups can send values up or down, sometimes with little warning.

Diversified commodity funds have disappointed in recent years, utterly failing to keep up with inflation. It’s a reminder that timing and picking the right stuff really matters.

Storage costs can eat into your returns if you actually own the physical commodity. Metals need vaults, and ag products need climate control and don’t last forever.

Market timing is tough. Investors need to be sure to sell before deflation sets in and commodity prices drop.

Currency swings can mess with your returns, too. Most commodities trade in US dollars, so if the dollar gets stronger, you might see lower returns even if prices rise elsewhere.

Tax implications aren’t the same for every type. Physical metals might get taxed as collectibles, and ETFs can have different rules than direct ownership.

Using Inflation-Protected Securities and Bonds

Government-backed securities actually adjust their payments and principal based on inflation. These bonds help protect you when regular fixed-income investments start losing ground to rising prices.

How Treasury Inflation-Protected Securities (TIPS) Work

Treasury Inflation-Protected Securities (TIPS) are bonds whose principal and interest rate payments rise along with inflation. The U.S. Treasury rolled these out in 1997 to give investors a way to fight inflation risk.

TIPS bump up both the principal and the interest payments based on the Consumer Price Index. So if inflation goes up, the bond’s value does too, and you earn interest on that higher amount.

Let’s say you have a $1,000 TIPS bond with a 1% coupon. You’d get $10 a year if inflation stays flat. If the CPI jumps by 2%, the TIPS adjusts its principal upward by 2% to reach $1,020. Now your 1% coupon pays $10.20.

Key TIPS Features:

• Available in 5, 10, and 30-year maturities
• Backed by the full faith and credit of the U.S. government
• Semi-annual interest payments adjust with inflation
• Principal repayment guaranteed at the original value or higher

TIPS yields are currently positive, meaning investors who hold individual TIPS to maturity can earn a positive inflation-adjusted yield regardless of the inflation rate.

Inflation-Protected Securities Beyond TIPS

Series I Savings Bonds represent another inflation-indexed bond type issued by the U.S. government. These adjust their rates every six months, tracking inflation data.

I Bonds are a bit different from TIPS. You can’t cash them in before a year, and there’s a penalty if you redeem within five years. But you get some tax perks, and they’re safe from deflation.

I Bond Characteristics:

• You can buy up to $10,000 per person per year
• Interest compounds semi-annually
• You can defer federal tax on interest until you cash out
• No state or local taxes

Mutual funds and ETFs also let you invest in inflation-protected securities. These funds offer professional management and diversification across multiple TIPS with different maturities.

Some funds focus on short durations to reduce interest rate risk, but those might not keep up with inflation as well over the long haul.

Comparing TIPS to Other Bonds

TIPS usually cost more than regular Treasury bonds with similar maturities. That extra cost? It's basically the price tag for inflation protection.

The breakeven inflation rate gives investors a way to line up TIPS against regular bonds. This rate marks the inflation point where both types end up with the same inflation-adjusted return.

TIPS vs. Conventional Bonds:

TIPS can lose value if inflation ends up lower than people expect. In times when inflation drops or deflation creeps in, some investors lean toward conventional bonds instead.

Both TIPS and regular bonds deal with interest rate risk. If rates climb, prices tend to drop. But if you hang on to TIPS until they mature, you get either the inflation-adjusted principal or your original investment—whichever turns out higher.

Taxes work differently for these two. TIPS investors pay federal taxes each year on both the interest and the increase in principal, even though you won't see that principal bump until the bond matures. Not exactly intuitive, right?