With the governments of the world printing money to help free the money flow from the institutions to borrowers, there is a possibility of higher inflation when the economy decides to turn around.  What what kind of inflation will we be looking at?  Could we be facing hyper inflation with double digit interest rates?

How exactly would high inflation affect you and me?

  • Mortgages/Debt – People holding fixed rate debt have an advantage as they could possibly be paying interest less than the rate of inflation.  Higher inflation = Higher interest rates.  Variable Rate holders may want to consider locking in a fixed rate if increased inflation is evident.
  • The Savers – The opposite is true for savers (like myself), cash/spending power will decrease during times of high inflation.
  • Bonds – Bonds not indexed to inflation tend to do poorly during high inflationary times.  However, real return bonds are a different beast.  See below.

How to Hedge against High Inflation?

  • Real Return Bonds – Real return bonds pay their distributions adjusted for inflation.  You can see how these assets perform well during high inflation.  Check out the iShares ETF, XRB.
  • Invest in Assets/Equities – Minerals, hard assets, or equities that produce hard assets are another way to hedge against inflation.
  • Real Estate – Real estate has historically shown to be a great inflation hedge.  Don’t own real estate?  Perhaps REITs like REI.UN or XRE would provide a hedge as well.
  • Go fixed – As mentioned above, if you have variable rate debt, it may be in your best interest to lock into a fixed rate loan when increased inflation becomes apparent.  That way, variable rates can’t get into the range where the payments turn unaffordable.

What To Do?

As with any strategy, you can adjust to the current economic situation or stay put.  For most, it’s best to stay put with a balanced, risk adjusted, asset allocation.  As we can see from long term market returns during high inflationary times, equities still come out ahead.

For me, I’m going to wait and see.  The biggest risk I face right now is perhaps my variable rate mortgage and significant cash (to me) that I hold.  What are your plans if we face high inflation?

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Investing in good quality dividend stocks would provide you with a more than adequate long term protection against high inflation. In inflationary times Companies sell products at higher prices, and their costs take time to adjust up, leading to increases in profits. Furthermore companies’ assets tend to increase – buildings, inventory etc..

You may want to seriously, seriously consider locking in your mortgage now.

First, we now have one of the lowest prime rates EVER in Canadian history (2.5%). The oldest data I was able to find for the prime rate goes back to 1974. In the 35 years shown on that chart, the prime rate has always been higher than it is now. The lowest it has gotten is 4% in 2002 and 2004, but the highest is 22% in 1981! According to another site I read but could not verify, today’s rate of 2.5% is the lowest Bank of Canada prime rate ever.


Second, there is a decent chance that we are in for a period of hyperinflation or at least high inflation. In order to try to fix the world economy, trillions of dollars are being printed, created from thin air like magic, and that will drive prices up. You can read about this anywhere by doing a quick search.

In other words, historical precedent tells us that this is a great time to lock in as prime is not likely to go lower, and current economics tells us that this is a great time to lock in because prime could go much higher very quickly.

It’s a tough call, this inflation thing. Will it happen? Will it not happen? How high? How fast?

I would say there is at least until the end of this year before interest rates see any kind of significant upward movement. Why? Basically the BoC mirrors what the US does, and the US cannot afford high interest rates right now, it would kill them. I think the US has to get all their bailouts/TARPs etc in place first and then start edging up rates. They also have to wait for the commercial real estate nightmare to collapse and buy up all those “bad assets”.

But then again, look at Japan. Yikes. They’ve been at, what, 0% for like 100 years! So really, who knows what’s coming down the pike.

As for mortgage rates, the last research I did was from 1950 (or something like that) until 2005. The average mortgage rate was around 10%. I think the BoC benchmark is 0.5% (is that correct?).

I don’t think there will be global hyperinflation. You simply cannot discount the power of governmental manipulation. The US is still THE major player, and they have too much pride to concede anything or admit failure. Manipulation to keep things low will happen — take advantage of it whilst you can (ie kill that mortgage!).

Inflation is BS anyway, so as FT mentioned, a great way to offset is to invest in REAL assets that people need and use — real estate, oil, agriculture, gold(?).

My 5 year fixed mortgage does not expire for another 20 months. Currently I am locked into a good rate of 4.5%. Does it make sense for me pay the penalty to break my mortgage and lock into another term now or should I gamble and wait until I can renegotiate legitimately? I know there is no crystal ball but does anyone have a guess?

As far as I can see inflation WILL happen and it will be strong, but when i dont think anyone knows. I say:
1. Lock in mortgage 5 or longer term
2. I know many are worried about bonds being losers during inflation, but remember proper asset allocation is the key to portfolio returns (90%)
so dont just go 100% equities.

How strong will the inflation be? with all the stimulus I can only see it being very strong, more so in the US than in Canada. Inflation will also effect your cost of living so anyone stacking up food items?

Free money Finance had a nice guest post on this topic:

Real estate as an inflation hedge? How is it different from a stock like Johnson&Johnson or GE, which both have cash flows tracking inflation? Real estate is like anything else. If it is leveraged to the gills, rising inflation will destroy its value because the cost of capital increases faster than cash flows from rents can adjust.

It’s the leverage, silly.

@209 if you have a fixed term mortgage, your lender will usually let you “blend and extend”. i.e. they will let you extend your mortgage back to a 5 year (or some other) term and they will give you a rate of the difference between your current rate and today’s current rate. There is usually no charge for this. Just call them and ask.

@ jesse:

I don’t know how tight the correlation between inflation and rental rates are so you might be correct that interest rate payments may rise more quickly than rent,

but the equity in the real estate will be protected – as opposed to bonds or some other asset class.

MDJ, I’d add a ‘secure job’ as a hedge too. Earning inflated dollars vs. living off dollars earned in the past will help those part-tie retirees, stay at home families etc.

Re: the “secure job”…a) that might be a concept of past economies and b) do real wages really keep up with inflation? I’m sure there’s data or a chart somewhere that shows wages have not done all that well over the last quarter century.

Re: the mortgage lock…I too have a 5-yr fixed but with less than 2 yrs on the term. I will most likely wait until…I’ll go until the September BoC rate announcement to re-finance at a lower rate (and yes, suck up the couple $100 penalty). I can’t see the BoC (or big banks) raising rates any time soon, but I would bet they will start to creep up before the end of the year.

Basically, put your money in whatever you think will increase in price (or increase compared to purchasing power of your dollar).

The funny thing is, there is nothing backing any fiat currency so all this inflation jabber is a just little bit ridiculous.

Just read this:

By The Canadian Press

OTTAWA – With economic recovery still looking shaky, the next move by the Bank of Canada may be to just start printing money.

The price can be high. Devaluation of the loonie and run-away inflation down the road.

But with economies running on empty, central bankers are inclined to focus more on solving the mess at hand than theoretical messes of the future.

CIBC chief economist Avery Shenfeld says printing money is becoming a key tool used by central bankers to try and keep the recession from turning into a lasting depression.

Avery and other economists don’t expect Bank of Canada governor Mark Carney to go nearly as far as his counterparts in the United States and Britain, who have pumped trillions of dollars into the market, unless conditions seriously deteriorate.

But they note, with the prospects of a quick recovery receding and the bank’s trendsetting interest rate near zero, Carney may have to resort to unusual measures to spark borrowing and boost the economy.

* * *

Inflation! Coming to a country near you!
We are already riding on the insane coattails of the US, but if we start printing more fake money as well…I’m moving to Iceland.

Scott, don’t go to Iceland, they already have their own inflation problem…..

There is a lot of worry of inflation, and for good reason. I dont see an interest rate rise for at least another year. We are currently dealing with a deflation issue, which is alot bigger problem then inflation itself. Anyone holding variable should pay attention to rates but I wouldnt worry for a while.

@Mark…well…Iceland seems attractive seeing as how they’ve crumbled and are starting over from scratch (including a new government). They won’t have to sit through the hassle and prolonged agony of 2, 3, 5, 10(?) years of trying to ‘fix’ things, because their things have already crashed and burned completely.

My doubloons should be worth something over there!

Inflation… strong inflation, in coming years. How soon? 2 years? 5 years?

Picture a world where each year your wages rise at only half the rate of inflation, your purchasing power declines year after year and your home continues to decline in value. Add to that an oil supply crisis that is just around the corner that will further stoke the inflation fires and we’re in for a real doozy of a coming decade. Toss out all of your old economic assumptions, spreadsheets and tables, kids, we’re entering an entirely new economic world here. We’ve been riding the cheap oil/borrow-’til-we-drop train for far too long.

Sarlock….relax my man. The sky is not falling. You are forgetting a couple key points.

1. There will be an oil crisis but not as you describe. The crisis will be that the industry as we know it will disappear. Not only has the supply of oil peaked (if you believe that) but also the demand for oil has peaked. The difference between the 2 charts is that the demand will diminish much much faster than the supply. Within 10 years you will not even be able to purchase a main stream vehicle that uses internal combustion. Even China has decided that it is going to an EV model. That leaves India and they will follow suit.

2. You assume that inflation will essentially ruin us. But the inflation that we are about to experience (which I feel will be more bark than bite) will also fix the ‘borrow-’til-we-drop train’ that you also reference. Low inflation/low interest rates simulate spending…..and high inflation/high interest rates simulate savings. No worries…it all works out in the end. We just need some balance.

The economy just needs a correction so that we can return to stability. Fear mongering and total pessimism can develop into a global self fulfilling prophecy….which is foolish. Nothing ‘real’ has changed in the world…no natural disasters, no new terrorism attacks, no food shortages, no new wars…nothing. Everything is just a figment of our imaginations….but unfortunately that is what our economy is based upon.

How to hedge against high inflation? Easy, ABOLISH and outlaw central banks and return to the gold standard.

Google the “Austrian school of economics” and read Ludwig Von Mises’ articles. That’s the way to fix things.

what about buying gold and silver? people seem to be losing faith in paper money.

The damage to savings may not be that bad, since rising interest rates will give them a better return. As long as the real interest rate is positive (and with the level of banking competition that’s still left it should be possible to find one) you aren’t losing anything.

I don’t like seeing interest rates go down now, but with prices of many things decreasing as well (at least temporarily due to sales) it’s not as bad as it looks either.

When experiencing inflation hold/purchase anything that money buys and little money… In deflation hold lots of money and little else.. Inflation is a monetary phenomenon, too many dollars chasing too few goods. You can buy stock, house, gold…. Anything tangible.. It’s the poor folks with money in the bank living paycheck to paycheck who get decimated during inflationary times..

I’ve been doing some reading and research about precious metals (mainly silver) as an inflation hedge. Before I present my case, it must be understood that it is a silver vs. cash comparison in the face of inflation — holding silver instead of cash to preserve purchasing power.

(All calculations omitted for simplicity. Provided upon request. Bank of Canada calculators used.)

Years: % Change in the Value of Money per Annum*

1913 – 2009: silver +1.02%; cash -21.5%(!)
1950 – 2009: silver +1.08%; cash -3.85%
1970 – 2009: silver +2.46%; cash -4.54%
1990 – 2009: silver +3.01%; cash -2.05%

(*Average Annual Rate of Purchasing Power)

Any professionals out there agree with this? It looks to me that precious metals are a pretty safe, and established, hedge against inflation. Again, this is against cash holdings and for the sole purpose of preserving wealth and purchasing power.

I wouldn’t consider the stock market or real estate as inflation hedges.

Wages do not keep pace with inflation. Wages are sticky and only negotiated periodically. Plus, wage increases are based on historical inflation whereas asset prices reflect anticipated inflation. Wages tend to lag behind the curve.

Stocks can do well in low, controlled inflationary environments. Mild inflation helps companies that can depreciate their liabilities, inflate their assets and raise prices.

Stocks don’t do well in high inflationary times. For one, consumer purchasing power falls (because wages can’t keep pace) and real consumption declines. Secondly, the inflation premium in discount rates used to value stocks become punishingly high, thus keeping stock prices low.

Scott, I’m confused as to why you wouldn’t consider real estate as a hedge against inflation when you can rent properties and have someone else pay the mortage? Maybe you are referring to real estate investing as opposed to ownership?

Staceyann C. Dolenti