Investing when you expect inflation or during inflation can be challenging, but modifying your investing to account for inflation is crucial to your financial success. Inflation is the hidden tax, and you must consider the effects of inflation or deflation on your investments. When you consider the effects of inflation, you then must evaluate the time-horizon for your investments. Whenever you are evaluating an investment, you must consider the rate of current and projected inflation, the time-horizon of the investment, and your exit strategies for the investment.
According to Wikipedia “inflation is a rise in the general level of prices of goods and services in an economy over a period of time.” Also, “Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.” In the U.S. the money supply increases when the government prints more money, and is also how the government can pay its own debt with cheaper dollars. When the currency was based on gold, this was not possible, because you couldn’t create gold out of thin air, like the government does by printing Federal Reserve Notes when needed. This leads to the first strategy for investing during inflation: that is, investing in gold. This strategy may be considered more of “insurance” against inflation, rather than investing. I consider this a more longer term strategy. The same strategy can be applied to silver, a more volatile commodity. In the April 27, 2011 post on my blog “US Dollar, Silver, Inflation and More”, you can see the S&P measured in the value of silver.
Another strategy to invest during inflation is to invest in other stable currencies. You can invest directly in specific country currencies or you can invest in a group of currencies. The Swiss franc has been a relatively stable currency and has performed well. Do your research first. I believe it is more important now, than ever, to acquire a global investing perspective. The economic climate of the world is constantly changing, and only investing in your own economy will limit your choices and overall success.
Real estate historically has been a good hedge against inflation, as prices go up usually so do rents. In commercial real estate, you may have to wait a few years to make lease changes, while these adjustments can be made more frequently in residential real estate, usually annually. Again, the time-horizon comes into play. You can combine investing in real estate with the quality of a foreign currency by investing in foreign real estate. You should be careful of countries whose currency is tied to the US dollar. You can also use IRA money for this type of investing by setting up a self-directed IRA/ I have done this and purchased commercial properties in Canada.
Caution should be used when considering the government’s statistics on inflation. For example, the government Consumer Price Index (CPI) data has been manipulated by changing how it is calculated (what is included in the index). If the CPI were calculated the same way as in 1980, for example, the data are dramatically different (shadowstats website charts these data). It is likely that the inflation you are experiencing is much greater than that indicated in the CPI.