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?