Best investments during times of inflation: 2 assets
“The Consumer Prices Index (CPI) rose by 5.1% in the 12 months to November 2021, up from 4.2% to October. This is the highest CPI 12-month inflation rate since September 2011, when it stood at 5.2%.”-ONS
“Inflation hit an annual 5.4%, its highest since March 1992 and up from 5.1% in November, itself a decade high.”-CNBC 19/01/2022
Likely impacts of inflation on investments
A 2000 study conducted by Steven A. Sharpe at the Federal Reserve concluded that “market expectations of real earnings growth, particularly longer-term growth, are negatively related to expected inflation … inflation also increases the required long-run return on stocks.”
Inflation rates and share prices
During times of inflation, firms costs rise thus profits decline. This suggests that companies may pay out less dividends, as a result many may sell their shareholdings or delay purchasing shares, making shares less attractive to potential investors.
Inflation rates and saving
Inflation rates and saving
Similarly, during times of high inflation, saving can also be less attractive as most returns offered by banks are generally lower than the rate of inflation, suggesting that any returns get eaten away by inflation. This means that the purchasing power of your savings get eroded by inflation implying that it will take you a longer period of time to save up for whatever you’re saving towards.
Inflation rates and house prices
However, house prices do rise with inflation so owners will benefit from rising house prices. However, first time buyers or anyone wanting to buy a house in the current times will require increased funds to do so, this than means that less are able to afford to buy a house but demand remains high, further pushing up house prices. Furthermore, rental income is also likely to rise with inflation maintaining the purchasing power of your rental income. Overall, houses are seen as a good asset to own during times of rising inflation.
Inflation rates and retirement income
During times of rising inflation the retired are one of the worst hit individuals because they are on a limited income. However, in the UK in 2010 the government introduced a triple lock guarantee which ensures that pensions keep in line with inflation. However, if you are not yet retired and are currently planning for retirement it is suggested by professionals that you save more towards your pensions so as to take inflation into account, they also suggest that you invest in pension schemes and other investments which keep in line with inflation.
Best investments to hedge against inflation
Gold
Gold usually holds its value and isn’t impacted by inflation. However, when inflation rises interest rates also tend to rise so gold may not provide any returns however, it does keep the value of your money, as the value of gold tends to be pretty stable.
Real estate
The value of properties rise with inflation and rents also rise with the inflation rate, so you can maintain the value of your income from property, as it was mentioned above.
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