Inflation refers to a currency's decline in purchasing power over time. It reflects an increase in the average price of goods and services in an economy in a given period.
Oftentimes, inflation is reflected as a percentage. The higher the inflation percentage, the lower the value of a currency in a given time frame.
Inflation rates vary based on the current state of the economy.
For instance, there was significant deflation during the Great Depression. At that point, the value of money depreciated, and prices on consumer goods dropped.
Comparatively, inflation rates rose during the late 1970s and peaked at 22% in 1980. This occurred in conjunction with increases in consumer prices on various goods and services.
The Great Recession, which took place from December 2007 to June 2009, was a notable period in terms of inflation. At that time, the average inflation rate was nearly double the Federal Reserve’s target of 3.8%.
Most recently, the coronavirus (COVID-19) pandemic has impacted inflation. Between December 2020 and December 2021, consumer prices increased 7% due to the COVID-19 pandemic. These prices look poised to continue to increase in the foreseeable future, too.
It pays to examine inflation rates, particularly if you’re planning to make investments. A clear understanding of the “fear and greed index” is also important; this index shows what emotions are currently impacting the stock market.
Furthermore, it helps to know how inflation can impact your investments. That way, you can avoid investment depreciation due to inflation.
Best Ways to Avoid Depreciation Due to Inflation
Here are three ways to guard against depreciation due to inflation.
Resist the urge to put all of your eggs in one basket. Rather, diversify and make a variety of investments.
For example, you could purchase a wide range of cryptocurrencies. You can invest in crypto coins in finance, medicine, and other industries. This spreads out your crypto investment risk across multiple sectors.
In addition, you can buy crypto in intervals. Set up price alerts to track the price of myriad cryptocurrencies. Once a cryptocurrency reaches a certain price level, buy it. This helps you avoid buying crypto at high prices.
Along with crypto, you can capitalize on stocks, bonds, real estate, and other investments. Evaluate myriad investment opportunities. From here, you can make investments that help you maintain a broad and successful portfolio.
2. Avoid Holding Large Quantities of Cash
Don’t sit on cash that could be making money for you. Set aside enough money to cover three to six months’ worth of expenses. Beyond that, capitalize on investment opportunities.
Keep your money active. This ensures your money is always working for you, and you can consistently grow your wealth.
3. Invest in Protected Assets
You can find assets that are a hedge against inflation. Purchase treasury inflation-protected securities (TIPS); these are low-risk and tend to rise in value during periods of high inflation. Commodities and precious metals can provide great protection against inflation as well.
Assets Protected From Inflation
No asset is 100% inflation-proof. But here are four assets that may offer some protection against inflation.
Gold protects against excessive asset price inflation and currency debasement. As such, some investors tout gold as a strategic long-term hedge against inflation.
However, research indicates gold has not produced a positive return during periods of consistent inflation since the 1970s. This has raised questions about gold’s ability to provide long-lasting inflation protection.
2. Real Estate
As the price of consumer goods and services rises, the price of real estate tends to increase. Therefore, buying real estate is becoming an increasingly popular way for investors to hedge against inflation.
When mortgage rates are low, investors are more prone to buy real estate in cities and towns across the country. If real estate demand continues to increase, these property-buyers can enjoy substantial returns on their investments.
You need to conduct plenty of research before you invest in real estate. This ensures you can find real estate in an area where property values are projected to rise.
Location is key with real estate investments. If you buy real estate in an area where property values are unlikely to rise, your investment’s value is unlikely to increase.
If you want to invest in real estate, you may need substantial upfront capital. You may also require a mortgage loan to purchase real estate.
It can take many years to reap the rewards of a real estate investment. Those who work diligently to improve and optimize their real estate and stay the course can realize the full value of their investment.
There is usually a positive correlation between investments in crude oil, natural gas, as well as other commodities and inflation. In 2021, commodity exchange-traded products generated over $6 billion. This represented 36.5% organic growth for the year.
You can invest in commodities by buying physical goods. Moreover, you can buy exchange-traded funds (ETFs) that track specific commodity indexes and stocks of commodity-related businesses.
Also, there are opportunities to profit off commodities via futures contracts. In a futures contract, you agree to buy or sell a commodity at a specific price and date.
If you pursue commodities, evaluate the risks associated with them. Commodities can be volatile, so you should try to learn as much about them as possible.
A value stock tends to perform well in periods of high inflation. This stock trades at a price lower than expected, relative to a company’s performance. Plus, it can pay a dividend.
On the other hand, a growth stock is typically a poor choice for guarding against inflation, Evidence Investor points out. A growth stock is projected to grow at a rate above the average growth for the market. It does not generally pay a dividend.
To choose the right stocks, you need to know which criteria to evaluate.
Oftentimes, it helps to look at a company’s trends in earnings growth. This gives you a good idea of how a company’s stock has performed recently and provides a strong indicator of the business’s future performance.
Consider a company’s industry and the competition before buying its stock. A company that is developing new products and services is trying to keep pace or move past its rivals. In this instance, the business may provide an excellent investment opportunity.
Take a look at whether a company offers dividends and how it treats them. If a business offers dividends, you’re assured of earning money from your investment year after year.
Is Crypto Protected From Inflation?
Cryptocurrency can be an inflation hedge. To understand why, consider Bitcoin.
Bitcoin was created in January 2009. The crypto’s value has increased steadily since this time, reaching a high of $68,990.90.
Over the years, the crypto market has grown. In addition to Bitcoin, investors can purchase Ethereum, Ripple, and other cryptos. There are even meme cryptocurrencies like Dogecoin and Shiba Inu that are garnering investors’ attention.
Ultimately, crypto is one of many investment options that can help hedge against inflation. But like other investments, crypto is not risk-free.
For those interested in crypto, consider your options carefully. It helps to start slow and build your crypto portfolio over the course of several years.
Keep in mind that the crypto market is volatile. Prices of cryptocurrencies can rise and fall quickly, but the overall market is expected to continue to grow. Thus, those who stay the course are well equipped to get the most value out of their crypto investments, regardless of inflation.