Skip to main content

Inflation will simply erode your buying power, regardless of what salary span you are in. Logically, it’ll hurt more the less you earn, but either way, inflation (another word for rising prices) simply is when your cash savings and investments with fixed income become lower as prices rise drastically.

I like to look at various numbers, charts, and studies (for fun) and read in-between the lines. When the European Central Bank and the U.S. Fed kept saying “everything is under control” – I would hope that you know that you need to read between the lines. Last year at roughly the same time as my tweet below referring to Brazil, the U.S. Fed stated:

“We do not seek inflation that substantially exceeds 2 percent, nor do we seek inflation above 2 percent for a prolonged period,”

There are countless articles you can Google about various statements from both the Eurozone and Christine Lagarde and the U.S. Now while there are many factors that play into this, from the Pandemic to monetary policy, all of which I won’t go into detail about, as the point here is to look at what can be done about inflation, I want you to question the narrative you’re being sold. Understand, comprehend, and adjust accordingly. In this case, safeguarding your assets.

If your money is not growing year on year, and I don’t mean through plain income and saving, then it is eroding away. Inflation per se in an economy is not a bad thing. We always have inflation. It’s the term used to narrate the steady rise of prices for services and goods that affect every area of any economy. The important thing here is what governments and central banks do and why. That affects inflation because ultimately the value of your Euro decreases as inflation increases. The best thing you can do is to educate yourself and with a bit of foresight and planning try to protect your assets.

The simple solution is to invest for inflation, in other words, choose investments that will give you a return on those investments that is greater than the rate of inflation (or at minimum keep it at the same rate).

None of this is meant to be any kind of financial advice. Like all things in life, I find that it is important to do your own due diligence, research, and digging into material that may be important to you, and I believe finances should be one such area. I am dispensing my thoughts on the topic to hopefully spur some thought for you.

Interpreting inflation

Simple definition, as mentioned above – the rising prices of goods and services across the economy over a period of time.

Inflation is measured with what is known as the “Inflation Rate” (more basics here) and is simply a percentage of change in the price index from one year (or time span) to the next. The price index is simply a representative sampling of goods and services. Simply imagine a basket of items. There are various such indexes – including CPI (Consumer Price Index) PPI (Producers price index) and PCE (Personal consumption expenditures). In most instances, you’ll see CPI as the main index. Some economists like to use PPI, but let’s keep it simple.

The rate of inflation is typically up to roughly 2% – in normal economic cycles. Anything between 2-3% is mild, between 3-5% is high, and anything above that is very high. Those are rough numbers. They expand out to decimal spots, but again, let’s keep it simple.

From an economist’s point of view, inflation is not bad, because a steady rise in prices means that overall there is a healthy economy. In other words, companies are producing, and consumers are buying. Employment and wages are on the up. Most central banks, with their fiscal policies, shoot for roughly 2% per year when it comes to inflation.

Hope that makes sense. A quick summary in a very very small nutshell.

Buying power

Even if inflation to a certain extent is considered overall “good”. It’s bad for your savings. Let’s simply say that the annual inflation rate is 5%. This means for every Euro you hold at the end of the year, you’d only have €0.95 cents in your pocket, even if you are actually holding a Euro in your hand.

And right now overall inflation is much higher than that. Lithuania is at ca. 14%.

“Euro area annual inflation is expected to be 7.5% in March 2022, up from 5.9% in February according to a flash estimate from Eurostat, the statistical office of the European Union.”

The catch is, is that not just money loses value, it’s any investment that generates a fixed rate of return or interest. The value of these assets is diminished as the return from those investments in real Euros is lower during inflation, meaning inflation eats the interest, hence a decline in value.

Just give those paragraphs some thought. And while inflation impacts all investors, it really hits income-oriented investors. And when I talk about investors, I mean in the general sense – you and me. Whether you own one stock, or property, or have a bond, or anything else. Regardless of sum or value.

What types of assets?

The world is currently in a big cocktail mix. I’m not going to dispense anything in particular here. Again, this is not investment advice. I want you to read this and walk away with some neurons triggered around financial thought. But things to consider during inflation are:

  • Appreciation-oriented assets – investments in certain industries that offer growth, not just income.
  • Real Assets – I’ll have to agree with Musk on this. These are assets that are tangible things with fundamental value. Real estate or certain commodities. Their value floats up with inflation. Keep in mind that inflation devalues nominal assets (CD’s, traditional bonds, etc.)
  • Variable interest rate assets – During inflation if you get a fixed rate, you’ll logically lose money. Assets with fluctuating interest rate gives your cash the opportunity to grow with inflation. (Now there are some aspects to consider here, which Ill point out below).

Where to invest?

Now that I’ve touched on the asset classes, it would be a little unfair o just leave it at that. It is important to me, that as I learn in many areas of life, I divulge that to the best of my capability so that my fellow humans have similar opportunities.

Take this chart with caution, remember to invest only in assets that reflect your goals, and depending on the inflationary climate, however, the chart at the bottom of this report (from RMB Capital) is a good rough indication.

Stocks

Generally, stocks beat inflation with their returns. Generally!!

Rising prices can mean more profit for companies, which boosts share prices. There are never any guarantees and often is industry-dependent, but generally speaking over the long term, the stock market historically has always beat inflation. The problem in today’s environment is, like my aforementioned cocktail mix, that the world is in a strong mixed environment in various aspects I won’t dive into, which makes investing in stocks a very tricky one in today’s period.

One alternative is to passive invest, for example, in an ETF. You’re investing into an industry or basket of stocks, hoping that the industry grows over time and hence has a solid hedge against inflation.

Real estate

This is always a real asset and typically an appreciation oriented one. Land and propery values tend to rise with inflation. And there are many ways to invest in this area. Just think outside the box – like I mention in this post.

Commodities

Real assets like crops, raw materials, and natural resources. These prices go up during inflation. Most typically, you’ll probably know of precious metals when it comes to commodities – gold and silver among others. Other ideas in this area are energy, oil, and gas.

Alternative investments

Fine art, vintage cars, collectibles. Things that are real and have an intrinsic value to collectors. Prices are hard to predict, but the value of such items tends to appreciate over time. Alternatively, in the digital world, NFTs and certain cryptocurrencies. I won’t divulge on NFT and cryptocurrencies as they only have been around since 2010, and it is not very clear how they will perform during high inflation, but anything that decouples from central bank monetary policy is worth looking into!

Technically I could also list TIPS (Treasury Inflation-Protected Securities), but I won’t list them separately because they are tied to the government (let’s say in the case of the U.S.), and are technically safe, but you never know what the future brings. The reason TIPS are better than say bonds is that they have interest rates that are indexed to inflation – meaning they adjust up and down. Whereas something like a bond has a fixed rate of interest.

I’ll let you do your homework on TIPS and decide.

Last but not least, and I also won’t list it separately, is debt.

You would think debt is the opposite of investing and its something you should technically avoid (at times), but having debt in times of inflation can be a good thing. Paying debt, as long as it has a fixed interest rate, makes it cheaper. Again, you would have had to incur it beforehand. How? Well, just as inflation eats away your cash value, it also eats away at the value of your loan. So those individuals who had fixed interest loans (vs. variable) have a small “bonus”.

If you can refinance, say your loan or mortgage to a fixed rate rather than a variable rate you can leverage inflation to your advantage.

Takeways

Now, while everyone wants to get rich, I find it important to understand financials to safeguard your assets and at the least let your finances grow with the overall economy to keep the overall value of what you currently have. Its about protecting your wealth.

So the key takeaway here is to know that inflation eats away your financial value. Keep some cash on hand, but not too much. Then invest through a strategy that at least keeps up with inflation and gives you that minimum same return. Dive into assets that appreciate and have a fundamental value or pay interest through a fluctuating rate.

No fear, no favor. Keep growing!

Leave a Reply