Inflation is the increase in prices and the subsequent decrease in the purchasing power of money. In simple terms, this means that you are buying the same amount of things at a higher price than in the past. The national/central bank of a country regulates inflation within a healthy range, which is as high as 2%, but it may fly very high in the event of an economic shock. Despite the increase in income, inflation makes people feel poorer.
As early as the 1970s and 1980s, the inflation rate reached double digits (10-15%), but it has gradually cooled and remained stable over the past few decades. Due to the COVID-19 outbreak, it soared again to 5.4% in the last year ending July 2021, which is the highest level in the past years.
A variety of factors may cause inflation to rise. One of the key reasons is the imbalance between demand and production, which ultimately leads to price increases. The entire costly production process, including raw material shortages, labor costs, etc., may also cause this problem. Inflation is regarded by consumers as a negative situation. However, if the correct approach is taken from an investment perspective, it may be a blessing in disguise.
You can increase your capital by investing in assets that hedge against inflation. The five key areas of investment are discussed below:
1. Real estate: Real estate investments such as fixed-rate mortgages tend to perform better when inflation rises, because the value appreciates and can protect you from rising rents. Therefore, if you invest in real estate at the right time, your capital will increase over time.
2. Stocks: In the long run, stocks are a viable investment option, but they may face a short-term collapse due to a sudden surge in inflation. It is worth noting that value stocks (companies with higher earnings relative to stock prices) have shown better growth than growth stocks that performed well during periods of steady economic growth.
3. Commodities: commodities such as gold, metals, petroleum, raw materials and other irreplaceable necessities tend to increase during the period of rising inflation. This is the safest paradise to avoid unpredictable conditions in the market.
4. TIPS: Treasury Inflation Protected Securities (TIPS) is a program led by the US Treasury bills to ensure people's purchasing power during inflation. Flexible adjustments to changes in inflation, more reliable than fixed-rate bonds. Backed by the government itself, ensuring continued purchasing power is a safe way to survive the inflationary period.
5. Cryptocurrency: Bitcoin is generally regarded as a kind of "digital gold". Due to its strong fundamentals, its supply is limited and demand increases, so it is considered a powerful inflation hedging tool. However, cryptocurrency is highly volatile, and investing in it is risky. Its long-term credibility remains to be revealed.