Inflation has been central to many conversations over the course of the last few years.
In fact, the U.S. Bureau of Labor Statistics noted the Consumer Price Index rose 6.8% between November 2020 and November 2021, making this new rise the largest increase since June 1982.
And the U.S. dollar from 1935 to now is down 97% in buying power. In other words, it will buy 3 cents of what it was worth in 1935 in today’s market.
That’s a tough pill to swallow.
Although this information is alarming, it’s still difficult to predict where the future of inflation is headed.
However, since inflation and the stock market are tightly intertwined, it’s crucial to monitor changes closely to determine how to invest during inflation and protect your assets at all costs.
What is Inflation?
As a refresher, inflation refers to an intentional increase in the price of goods and services. This can apply to anything from a gallon of gas to a gallon of water.
If enough time passes, inflation can disrupt an entire economy by reducing the value of its currency. If not reversed, this can then lead to hyperinflation, where inflation rates rise to meet or exceed 50% in a month.
Causes of Inflation
When we talk about inflation, the main culprit is an increase in the amount of money available. When the government prints more money to give to individuals—sometimes as a result of a major event, such as the COVID-19, for example—it legally devalues the currency to provide more of it to those who need assistance.
Enter the millions of stimulus checks issued to individuals navigating financial hardship brought on by the coronavirus pandemic.
But, this phenomenon doesn’t just apply to stimulus checks. An increase in the money supply is usually accompanied by a decrease in its purchasing power…and voila inflation is born!
However, inflation isn’t a one-size-fits-all concept. In order to determine how to invest during inflation, we must look at the three types of inflation: demand-pull inflation, cost-pull inflation, and built-in inflation.
When an increase in the money supply pushes the demand for goods and services past an economy’s production capabilities, you are dealing with demand-pull inflation.
If consumers have the extra money in their pockets, you can guarantee they’re looking for new ways to spend it!
This behavior can lead to spending surpluses and good shortages on items that were once readily available for purchase. Because of this, the cost rises in accordance with the surge in demand and the limited availability of goods and services.
We’re seeing a supply chain issue now within the U.S. as a result of the pandemic. Consumer demand for products is outpacing how quickly these can be produced.
Plus, the extension of unemployment benefits also continues to play a role as job seekers are more selective about which roles to accept because of that financial cushion. As a result, this continues to drive wages and prices upward.
These trends are also aligned with what Asian economies experienced following the SARS outbreak in the early 2000s. History is a great place to begin to look for trends and clues as to what the future may hold when it comes to investing during inflation.
Cost-push inflation is driven by an increase in the cost of wages and raw materials specific to certain goods. In other words, you will end up paying more for specific goods and services because production costs have become more expensive.
Someone needs to pay for the increase, and it won’t be those producing the goods. So, it’s going to be consumers…
Unlike demand-pull inflation, however, cost-push inflation is not characterized by a change in demand. Oil and natural gas prices are most commonly affected by this type of inflation.
Built-in inflation relies on what people predict future rates of inflation will look like. This typically happens when workers anticipate their salaries to rise at a rate equal to the rise in the cost of goods and services.
In other words, they demand more pay in order to keep up with increases in the cost of living.
Built-in inflation can cause fear that leads people to hoard money in order to avoid having to pay more as supplies become scarce and prices rise.
Logically, it seems reasonable to try to save money in this type of situation, but in reality, inflation renders cash savings worthless.
Because of this, you might need to reexamine your financial future to determine how the effects of inflation will impact your retirement and how much money you’ll actually need to save before you retire to account for that.
Inflation & the Stock Market
If you’re wondering what to invest in during inflation, the answer is to invest in stocks. There is no other investment that performs as well during a period such as this.
As I mentioned earlier, it makes sense that inflation and the stock market are closely connected because of how the stock market works. Specific events can cause stock market prices to change and inflation is one of them.
Once you become a shareholder in a company, monitoring your stocks becomes a habit. When the price of the stock goes up, the value of your shares increases as does your return on investment.
For this reason, value stocks perform better in high inflation periods because their worth fluctuates based on these increases.
Whereas growth stocks—named for their potential ability to outperform the market over time—fare better when inflation is low. Use this knowledge to build an inflation investment strategy designed to withstand the test of time.
How to Invest During Inflation
It can be challenging to know where to put your money during inflationary periods, however, follow these Rule #1 Investing tips to ensure you make good investments during inflation.
Research Wonderful Companies
Stocks are one of the best investments for inflation.
But, the key is not to invest in any type of stock. You want to look for stock companies that are necessities, such as food or oil businesses.
For more clarification, think about the types of companies that can raise their prices as the costs of materials and supplies rise.
The bottom line is you should buy stocks in wonderful companies that can raise their prices with inflation. These businesses are sometimes called big moat companies.
Wait in Cash
The safest inflation investment strategy, believe it or not, is to wait in cash. Wait until there is a great opportunity to buy stocks on sale.
Buy Stocks on Sale
Once you find a wonderful business, buy the stock on sale. This will give you a cushion against a market drop. In 5 or 10 years, these businesses will continue to experience massive growth and be worth even more than they are today.
Using our Rule #1 investing tools, you can determine when the big players will begin to back out, and that will be the time to take advantage of these. Because when the overvalued market comes down, you’ll be waiting in cash to buy that business back at a lower price.
Best Investments for Inflation
During inflationary periods, the best investments to make are ones in wonderful companies that meet the Four M standard of Rule 1 investing— meaning, management, moat, and margin of safety.
Want to unlock the secret to making money during inflation? Learn more about how to invest during inflation and download this useful checklist on How to Pick Stocks.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.