Inflation is one of the most openly-discussed topics in our contemporary society, as it’s considered a big problem that plagues all the economies.
Almost everyone is well aware of what inflation exactly is, but some people might find it confusing because it is difficult to define it unambiguously.
As per Investopedia – “Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.”
Inflation normally happens when the total money supply of an economy exceeds the limit of variable goods and services. Inflation may also happen when additional money is created to finance a budget deficit.
Inflation can increase the prices within a short timespan. As prices rise, the currency (per unit) loses its value because it can buy fewer goods and services. So, practically a consumer loses purchasing power which affects the general cost of living. This event ultimately leads to a downfall in economic growth.
For consumers, inflation can be really scary as it might stretch the paycheck even further. But for investors (especially those of real estate investments), inflation might create an opportunity to gain continuous profit as they add to their retirement portfolio.
“Inflation is always and everywhere a monetary phenomenon.” ― Milton Friedman, Money Mischief: Episodes in Monetary History
A nation’s monetary authority normally does everything to control the rate of inflation within limits so that they can keep the economy running and boost growth. Some level of inflation is required for national economic growth. The most common measurement tools used to rank inflation are known as the Consumer Price Index (CPI), and the Producer Price Index (PPI).
- The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.
- The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services. It is also reported monthly by the BLS. PPI measures goods at any stage along the production and output line.
Many different factors may influence the rising prices. When the overall demand for commodities increase, supply prices will rise. When the cost of production increases due to the growth in the labor cost and the cost of raw commodities, prices can also rise.
Most consumers might identify inflation as an adverse situation. However, as mentioned earlier, inflation does have a positive side if you view it from an investment standpoint.
Investments for Inflation
“Inflation is lower and more stable and the real business cycle fluctuations are more modest.” – Martin Feldstein
The Bureau of Labor Statics (BLS) started to release data for the CPI in 1913. Since that time there have been several periods of inflation. And beyond doubt, during these years, consumers have invested so many times in their lives. There are several asset classes that are popularly knowns as the best investment option, particularly for inflation and related situations.
The key point to make money during inflation is to engage and hold investments that will increase in value at a rate in excess of the rate of inflation.
These investment options for inflation will include real estate, commodities, and a few types of stocks and bonds. Here we will discuss the real estate investment.
Real Estate Investment to Fight Inflation
“People concerned about inflation today tend to buy big houses and nice cars.” – Robert Kiyosaki
Real estate is considered one of the best investments for inflation. There are a few specific reasons behind that theory. Rising prices will increase the resale value of homes over time, and increased real estate value can also increase rental income. The value of the rental property will be increased with inflation, and as a result, the amount of rent can also increase over time.
This increment may enable the homeowner to create an income through investment property. It will also give them a boost to keep up with the general price hike across the economy. Real estate investment will include direct home buying of properties and indirect investment in securities, for example – a real estate investment trust (REIT).
Like most of the people, we will need to retire considering our own current lifestyle. Depending on the market, the average real estate market growth can be higher than the inflation rate. Let’s make it clear with a simple example. The current inflation rate in Estonia is 3.7%. But the current market growth is 6%. Therefore, by directly buying real estate or investing in securities, you are actually becoming a winner against inflation and covering your losses with long-term capital growth.
“Let’s turn inflation over to the post office. That’ll slow it down.” – Morris Udall
On the other hand, if you invest in rental properties, you may also get a monthly steady earning as passive income.
Therefore, real estate investment is a tool to fight inflation and produce cash flow now and in retirement. They are also called Inflation hedge investments which are normally assets. These assets are expected to increase over time or keep their value intact. When the value of your properties is appreciated due to inflation, it’ll also increase your passive income. By using that income you might be able to manage your unsecured debts such as your medical bills, utility bills, phone charges, etc. Apart from that, it’ll also be helpful for big debts like paying off credit card debt, payday loans, or any other liabilities.
Conclusion
“The only way to battle inflation is to make more money, but for most U.S. workers, real wages- that is, after inflation is taken into account- have been stagnant or even falling for decades (the famous middle-class squeeze).”
Real estate investment will give you the lowest risks compared with other investment options like loans, bonds, and stocks. It is the best option to fight with inflation and get the best returns available on the market.
This article has been contributed by Aiden White.