The high inflation has hit the global economy in the past year and counting. As measured with the price index of consumers, it is forecast at 7.8% during December of 2022, the highest annual rise since 1990.
Inflation has been high globally since the inspection of Covid 19, when the production chain decreased, causing a great demand with a minimal supply chain.
How Can One Beat Inflation
Inflation is undetermined but can be arrested through meaningful investments, regardless of the wave of inflation the value of your investment is maintained
Rates on loans are not always stable to bank on, inflation affects stocks and even when you decide to keep your savings in cash, there is no guarantee
Investment You Need To Beat Inflation
Bonds
Inflation-linked bonds are a kind of fixed-income investment that is designed to protect investors from inflation. Principal and interest payments are linked to the CPI and rise if inflation rises.
“Australian inflation-linked bonds are currently trading on a breakeven rate of about 2.5% for the next 10 years,” says Foot.
“That means if inflation exceeds this level over the next decade, then you will be better off holding 10-year inflation-linked bonds compared to the nominal equivalent. If inflation turns out lower, then nominal bonds will be superior. In the US, the equivalent 10-year breakeven rate is slightly lower at around 2.3%.”
Traditional bonds are also great in recessionary environments.
Commodities
Commodities, which are indelibly associated with Australia’s GDP, come in two forms for investment purposes: hard and soft. Hard commodities, such as metals or energy, need to be drilled or mined, while soft commodities, such as wheat, are grown.
Commodities have long been considered a traditional inflation hedge because they are inputs into other goods. Cars need steel and other metals, for example. They are considered foundational and therefore their prices will generally rise ahead of prices for the end goods.
“The prevailing growth and rate backdrop has been affecting assets in different ways,” says Foot.
“Energy, commodities, inflation-linked bonds, and floating rate notes each prefer an environment where inflation is high and rising. Inflation-linked bonds have a linkage to inflation but there is also a duration element—so they prefer high inflation and falling growth. Energy is not averse to inflation but differs from inflation-linked bonds in that energy prefers stronger economic growth.”
Floating rate notes are a form of fixed-income investment, where the principal is repaid at maturity, and the interest rate is tied to a market interest rate.
REITs
Real Estate Investment Trusts (REITs) and other real estate investments that have underlying revenue streams have become popular among Australian investors. As the ASX points out, A-REITs are investment vehicles that offer “exposure to property assets such as office towers, shopping malls, industrial building” without a bricks-and-mortar purchase from the individual investor.
“Many of the valuation opportunities right now are presenting in those assets that would prefer a fall in inflation and rates. Value often resides where the stress sits. For example, Global REITs offer sound valuations right now and have been left behind compared to broad markets,” says Foot.
REITs that are linked to inflation are also considered traditional inflation hedges. But they can also be hugely impacted by interest rate increases.
“REITs have a linkage to inflation, but they carry leverage which makes them susceptible to higher interest rates,” Foot explains.
“US REITs legally need to pay out a large proportion of their earnings. They often use debt to grow. So, while REITS may hold assets with rental escalation clauses, this dynamic is being more than offset by their debt profile, which has seen REITs exhibit high sensitivity to rates.”
Control Your Expenses
There are two types of expenses you may incur—utility expenses and lifestyle expenses. While you can’t control the necessary expenses, such as loan EMIs, utility bills, school fees, grocery costs, etc., you can control your lifestyle spending. These may include buying clothes when you don’t need them, dining at restaurants, beautifying your house, etc.
By curbing your unnecessary expenses, you can increase your savings and also maintain your monthly budget when the prices of other things are skyrocketing.
Lower your household bills
Switching to paperless billing, direct debits, turning down your thermostat, and installing insulation can help to keep energy costs down.
If you usually wash your clothes on a super-hot cycle, change the temperature to 30C to save electricity and run it on a short wash.
When it’s time to buy or replace an appliance, look for a high energy-efficiency rating. We have more energy-saving tips here.
Make sure that you search around for the best mobile and broadband prices and cut subscriptions that you don’t use.
Cut Your Grocery Costs
Let’s embrace a more mindful approach to our food consumption. By knowing what’s in our cupboards, sticking to shopping lists, and learning to cook on a budget, we can reduce food waste and save money. Additionally, by taking advantage of local food apps and being aware of supermarkets’ price reduction timings, we can make a positive impact on both our wallets and the environment.
What happens when inflation rises?
When the inflation rate rises, the costs of commodities increase or in other words, the value of money starts decreasing. Consumer financing products, such as loans and mortgages become expensive as the interest rates also move in the same direction as the inflation rate. While the inflation rate depends on a lot of factors to control inflation, the RBI can change the interest rates.
Cumulatively, these factors start putting pressure on the pockets of general consumers. However, at the same time, higher interest rates also mean that you will start earning more on your bank deposits, and other fixed-income investments. So, to combat the impact of rising inflation and interest rates, you need to alter your spending and investing habits.