For most people, periods of high inflation are times of fear. After all, when everything costs more and your salary stays the same, the practical effect is that you take a pay cut. For those who were struggling to make ends meet in the first place, this can put them in a rather precarious position.
To make matters worse, it now seems like the current high levels of inflation could last longer than previously expected.
However, for others, times of inflation can also represent opportunity. But just how can you profit during hard times? We’ve written this short guide to explore some ways that you can capitalise on inflation.
What is inflation?
In short, inflation means the weakening of a given currency’s value. Economists can quantitively estimate this by measuring the increase of the consumer price index over time.
For you and me, inflation manifests itself in the form of rising prices. What these mean in real terms is that a unit of the national currency, the pound, buys less than it used to.
How can you counter inflation?
Many people mistakenly believe that their money is safe in a bank account. But unless a sum of money is growing at a rate that matches inflation, it’s actually losing its value. Since most savings accounts offer interest rates of less than 1%, holding your cash in a bank will mean that saved money will buy you less in the future than it would today.
Conversely, if you invest your capital in assets that grow faster than inflation, you can protect its value – and even increase it. While there are no investments that are certain to yield profits, investors have capitalised on inflation through the following methods in the past.
- Speculation
The opportunity to profit from the ebbs and flows present in financial markets doesn’t disappear during times of high inflation. This means that you can still speculate, using methods like spread betting to profit from asset price movements or day trading to make money through small yet frequent transactions.
- Precious metals investing
Historically, gold has made a good hedge against inflation. It maintains its value over time extremely well compared to other assets.
However, it’s important to note that investing in gold has its risks. The value of gold isn’t correlated to stocks, bonds, or real estate. This means that its value doesn’t always increase – even when the market is soaring.
- Real estate investing
Many people turn to real estate during periods of inflation. As goods themselves, houses increase in value during these times and can generally provide landlords with more rental income. However, you don’t necessarily need to buy property directly. You can also invest in it by buying shares of a real estate investment trust (REIT).
So, should you invest during inflation?
There are pros and cons to every investment decision. The primary benefit of investing during inflation is the preservation of your capital. However, don’t let fear pull you off the course of your overarching investment strategy. Inflation comes and goes, and the most important thing is for you to stay the course.
