How to Protect Against Inflation

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Rising inflation means I’ll pay more for things, and the money I’ve got parked in a “high-yield” savings account is effectively earning a negative return. That’s how I think about inflation. How do investment bankers think about inflation? Let’s just say they go into a bit more depth and use big words like “contango.”

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If your portfolio is already set up to reach your goals and hedge against most risks, returns should offset any inflation in the long run. But, there is a chance that Central Banks won’t get the job done to slow down inflation. If you think that’s the case, extra protection may be worth considering. Here are the best ways to protect against unexpected inflation.

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Ways to Protect Your Portfolio From Inflation

To reduce the impact of high unexpected inflation on your portfolio returns you may consider Inflation-linked Bond ETFs, investing in physical Real Estate, or Equities with business models having the ability to pass on costs. Choosing a Government Bond ETF with low duration can also mitigate impact.

Certain inflation hedges are obvious. House prices slowly adjust to maintain similar or higher value. Other diversifiers react to sudden unexpected spikes in inflation. In Nicholas Taleb’s words:

“I have learned through history that there is no such thing as inflation anymore. There is hyperinflation or nothing.”

Bankers Like Inflation

In fact, a 2% inflation target is the most desired outcome. A temporal overshoot to 3-4% is probably acceptable as long as it brings them closer to the 2% goal. Up until COVID-19 this 2% was hard to achieve because deflation is a powerful force. Consider this:

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How to Protect Against Inflation

Ways to Protect Your Portfolio From Inflation

To reduce the impact of high unexpected inflation on your portfolio returns you may consider Inflation-linked Bond ETFs, investing in physical Real Estate, or Equities with business models having the ability to pass on costs. Choosing a Government Bond ETF with low duration can also mitigate impact.

Certain inflation hedges are obvious. House prices slowly adjust to maintain similar or higher value. Other diversifiers react to sudden unexpected spikes in inflation. In Nicholas Taleb’s words:

What about Bitcoin and Gold?

“I have learned through history that there is no such thing as inflation anymore. There is hyperinflation or nothing.”

Bankers Like Inflation

Why Bankers Don’t Care About Inflation (For Now)

The key reason why bankers delay rate hikes to slow down inflation is that the accumulated public and private debt is massive and would impact its repayment and thus economic growth. As Russell Napier framed it “a central banker is someone who will permit inflation in anything except wages“.

In fact, a 2% inflation target is the most desired outcome. A temporal overshoot to 3-4% is probably acceptable as long as it brings them closer to the 2% goal. Up until COVID-19 this 2% was hard to achieve because deflation is a powerful force. Consider this:

SWIPE UP NOW TO READ MORE

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