Have you been paying attention to the recent economic news? If so, you know that inflation is making a comeback. It’s been years since investors and traders have had to worry about rising general price levels taking a significant bite out of profits. But, since early 2021, the cost of everything has been going up. That includes the price tags of just about every good and service at retail, wholesale, and producer levels.
The weakening national economy is hitting people in all industries and income levels. What if you’re an investor who wants to protect a portfolio from the pernicious effects of climbing prices? Well, there’s plenty you can do, so it’s not all bad news. For instance, whether your preference includes stocks, forex, commodities, good old cash, or precious metals, there are realistic, commonsense strategies for lessening the inflationary sting. Here are some of them.
People who own large stock portfolios, either as speculative tools or for retirement purposes, have a lot to fear from inflation. For example, say you hold a portfolio of varied stocks that’s currently worthwhile and that it’s growing at an average annual rate of 12 percent. That’s a nice return, but if the inflation rate is seven percent, you’re automatically losing more than half of your yearly stock market income. You can minimize that hit by considering stocks that do well during inflationary times, like consumer durable shares and exchange traded funds that track commodities.
Inflation rates in the various national economies have a profound effect on forex trading and often dictate which currencies traders value the most. While there are no hard and fast rules for those who trade forex regularly, inflation is generally considered a key indicator of the strength, and overall health, of a country’s economy. For active traders, comparative inflation numbers can be highly instructive. For example, if Country A’s inflation rate is at 10 percent and rising, while Country B’s rate is at 9 percent and decreasing, there’s a good chance that the currency of Country A will weaken against that of Country B.
That’s because high and rising inflation rates tend to harm a national currency’s value. And, even though there are many other factors in play, inflation is one that has a significant impact on the relative strength of foreign exchange rates. Some of what traders use to estimate inflationary pressures include the CPI (consumer price index), PPI (producer price index), and interest rate changes.
In difficult times, many investors turn to the commodities markets. Instead of owning an intangible piece of a corporation, investors who put their capital into a commodity are buying a piece of something real, like wheat, oil, cattle, copper, or any of hundreds of tangible assets that often experience value increases in otherwise troubling economic climates.
When the going gets rough, millions of investors get spooked and pull out of all the markets. They decide to park their money in cold, hard cash, often in bank or credit union savings accounts. While it seems like a wise move, holding cash during a spate of inflation can bring large losses. This is especially true for those who simply plunk all their money into low-interest passbook accounts, CDs, or money market funds.
For hundreds of years, working people have purchased gold and silver as a hedge against inflation. It’s easy to track the popularity of these precious metals simply by tracking the inflation rate. When the rate goes up, the demand for gold and silver usually follows within a short period of time.