Top Strategies for Investing in Periods of High Inflation

What are the best strategies for investing in periods of high inflation?

Great question. But first, let’s take a look at where CPI inflation numbers are as of July 2021. It’s clear that higher prices have been the pandemic recovery’s collateral damage. The pace of CPI slowed in July, but it still remains elevated, as price increases being caused by the reopening of the economy and supply chain bottlenecks continue to cause investors to be wary. Core consumer prices rose 4.3% over the 12 months ended in July. Overall, consumer prices rose 5.4% over the period, flat compared to June, when the index hit a 13-year high. Yes, a thirteen year high.

12 Month Percentage Change CPI, Select Categories

Source: US Bureau of Labor Statistic

US Annual Inflation Rate: 2011 to 2021


Much of the recent increase in inflation is tied to the reopening of the economy. Things like a sharp rise in airline ticket prices or a shortage in computer chips that has pushed up used-car prices have led to the sharp increase in inflation numbers.

The good news, however, is that, in July alone, when adjusted for seasonal swings, prices only rose 0.5% on the whole and 0.3%, excluding food and energy items. This actually represents a modest price uptick for the month of July. The figures offer some hope that the spike in inflation due to supply chain disruptions has peaked. Expectations for long-term inflation remain relatively stable this year even as price gains have taken off.  Policymakers are monitoring the faster price gains to make sure that they do not turn into a lasting.

When Will the Fed Step In?

Fiscal stimulus and a post-pandemic spending splurge could stoke higher inflation. It is, however, likely that the Fed will rein in its easy money policy sooner than later.

How do you profit from rising inflation? There are several asset classes that perform well in inflationary environments. They include tangible assets, like real estate and commodities. And other securities that include certain sector stocks and inflation-indexed debt. Let’s dive in.

Real estate in today’s market is a popular choice. Rising prices increase resale value. Real estate investments include direct ownership of property, as well as securities such as Real Estate Investment Trusts (REITs).

Commodities – Keep Your Precious Diamonds

Basically, commodities have historically been a good bet during inflationary period. Gold and other precious metals can be purchased as a direct hedge to inflation. Metals can be purchased directly or indirectly. For example, you may invest in the stock of a company that that mines gold. Or you many invest in a mutual fund or ETF that specializes in gold or other metals. Other commodities include oil, cotton, soybeans, etc. Whether energy, metals, agricultural goods or other commodities, most tend to rise during times of high inflation. And even collectibles such as art, wine and stamps can perform well in inflationary environments.

Investing in TIPS

Investors can invest in inflation-indexed bonds. These are known as Treasury Inflation-Protected Securities (TIPS). As CPI rises, so to does the value of TIPS, including the interest paid. Inflation-indexed bonds can be accessed by directly investing in TIPS through the Treasury or through a regular brokerage account. TIPS are guaranteed by the US government such that investors will receive all of their principal and interest after they reach their maturity dates. Mutual funds and ETFs may also hold TIPS. There are at least 14 distinct TIPS ETFs that trade. As of August 16, 2021, the top 3 TIPS ETFs include: 1) SPDR FTSE International Government Inflation Protected Bond ETF (WIP); 2) Flexshares iBoxx 5-Year Target Duration TIPS Index Fund (TDTF); and 3) Schwab US TIPS ETF (SCHP).

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TIPS are not free from risk. They are subject to volatility from the time they are issued until the date that they mature. And those purchased via mutual funds of ETFs are not as safe as individual bonds. Funds will be able to provide an element of inflation protection when the principal value of the bonds adjust upward with inflation, however, there is no maturity date. This means that investors will not be guaranteed a full return of principal.

One Downside for Bonds During Periods of Rising Rates

Additionally, higher inflation leads to higher rates, which equate to falling share prices for TIPS mutual funds and ETFs. The fear of rising inflation leads to a decline in treasury prices. Remember that prices and yields move in opposite directions. This would heavily weigh on the prices of TIPS and funds that invest in them. Ironically, in this sense, TIPS funds may provide the opposite of what investors were hoping for.

Buying TIPS directly is great if you can hold them until maturity.

Low to moderate inflation is generally good for equities because it tends to indicate positive economic growth, rising profits, and stock price gains. Think of it this way, as long as input costs do not rise at the same rate as revenues, a rise in profit margins should translate into greater nominal earnings. As a caveat, investors will need to discount cash flows at a higher interest rate when inflation rises. Not all sectors are equally affected by inflation and some may prove more resilient if inflation takes off. As far as stocks go, investors should focus on companies that are able to pass their prices on to consumers.

High Inflation May Hurt P/E Multiples

Source: Shroders Investment Research, article by Sean Markowicz

The equity sectors that tend to outperform the broader market in high and rising inflation (greater than 3%) include the following; energy, equity REITS, consumer staples, utilities and health care. Energy tends to be the big winner here, as their revenues are tied to energy prices.

US Equity Sector Performance in high inflation environments (3% + between 1973 to 2020)

Source: Shroders Investment Research, article by Sean Markowicz

In general, The Investor Weekly does not specifically recommend investing in securities purely to capitalize on the basis of rising inflation. Rather, we recommend inflation investments as a hedge; a way to diversify one’s holdings. In other words, don’t specifically invest in inflation. Instead, consider owning a basket of diversified commodities, TIPS, energy stocks, REITs, etc. Trend following during inflationary periods tend to work, as well. This basically involves holding assets that have risen in price over the past several months. The main way to spot winning stocks during inflationary periods appears to be momentum. Those stocks that are already rising may tent to keep rising, at least over short-term horizons.

The risk will be that the inflationary episode is not sustained. And if you don’t see a spike in inflation, then some of these investments may see sluggish performance. Investors must continue to consider how long this inflation period will last and how high inflation rates may rise.

For more in-depth articles to help you navigate your financial journey, check our Personal Finance page out!

Disclaimer: Nothing on this site nor any published commentary by The Investor Weekly is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.

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