Can Inflation Be Beat?
Kent Von Nostitz, Senior Accountant
In the span of almost 2 years, the United States Treasury has printed almost 13 trillion dollars. 5 trillion for Covid relief, almost 5 trillion for quantitative easing, which is money being pumped into the economy to stimulate economic growth, and 3 trillion for infrastructure. According to Merriam-Webster Dictionary, the definition of inflation is: a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services. This should come as no surprise that inflation is up 7 percent, and rising due to more money being in the economy and less goods available, for example your local car lot of new and used cars being almost empty.
Now that we have set the baseline for why we are experiencing inflation, we can explore the question if inflation can be beat, which the answer is, it is difficult but not impossible. If $1,000 was deposited into a bank account at the beginning of 2020, there would still be $1,000 in there but its value to buy goods and services would be about $70 less, as of today. So to beat inflation we have to put our money to work, meaning it needs to be invested in something that has a return of 7% or higher.
There are many was that a successful hedge against rising inflation can be achieved, but there is no get rich quick answer. Creating a diverse portfolio of traded securities and bonds is a common and relativity easy way to mitigate the negative impacts of inflation. Mutual funds are becoming very popular for investors just starting out and even experienced investors because it spreads the risk throughout many stocks and bonds without having too much exposure to one company. Through these funds, stocks, and bond markets there are plenty of gains to be realized but at the end of the day, but there is no guarantee.
Real estate investments can be great hedge against inflation. Owning and renting/leasing residential and commercial property have many positive financial and tax incentives. After initial capital investments, there are many upsides, like positive cash flow that is usually higher than the inflation rate. Property values over time stay on upward curve, similar the stock market, but has its down times like the 2008 housing crash. Depreciation, better treatment of gains when the property is sold, deductions of expenses, and deferral of taxes are just some the positive tax incentives that go along with real estate investing. Between the rising property values, and income that can be made renting or leasing, real estate investment has a great potential to beat inflation.
As the inflation rate continues on an upward trend, and has far reaching affects to all sectors of the economy and households, it is important to know how to diversify in ways that can help mitigate against the increasing rate. There are many other potential ways that inflation can be hedged against and it is important to explore all the possibilities. The good news is that some economist predict that the rising inflation rate will hit its peak this year and then slowly start to go down.