What is the best way to beat inflation?

What is inflation and why does it occur?

Inflation is a measure of the rate of rising prices of goods and services in an economy. It occurs when prices increase due to higher production costs, which includes the rate for raw materials and wages. A surge in demand for products and services also causes inflation as consumers are prepared to pay more.

When high inflation sets in, each unit of money buys less. Inflation is measured by the consumer price index (CPI), therefore the higher the rate of change in the CPI, the higher inflation levels will be.

A prominent theory is that inflation occurs due to an increase in the supply of money that exceeds the number of goods and services produced in an economy. This oversupply of money causes price levels to increase.

How to beat inflation with our inflation-beating assets

There isn’t a faultless approach to beating inflation, but some assets weather the storm better than others and are known as inflation resistant or anti-inflation assets. They store and preserve wealth even when stored funds erode.

Anti-inflation assets include:

1. Gold
2. Commodities
3. Real estate and investment trusts (REITs)
4. Value stocks
5. Inflation-linked bonds

Gold

Gold is considered a hedge against inflation; many consider gold as an ‘alternative currency’ particularly in countries where native tender loses value. Using gold when a country’s own currency has failed is preferable as it is a real, physical asset that holds its value.

Gold receipts are the earliest form of credit banking, where the commodity was stored by goldsmiths for community members. When members deposited gold, they each received paper receipts that were redeemable in future.

With us, you can trade gold using CFDs. This enables you to speculate on rising and falling gold prices using derivatives.

Discover how to trade in gold

Commodities

Commodities include grain, precious metals, electricity, oil, beef, orange juice and natural gas.

Commodities are an indicator of inflation; as the price of a commodity rises, so does the price of the products that are derived from it. Commodity prices tend to respond to changes in the dollar's relative strength in international markets rather than domestic inflation pressures. They may also respond to risk factors - such as natural disasters - in ways that do not necessarily correspond with inflation.

Learn more about commodities and how to trade them

Real estate investment trusts (REITs)

REITs – companies that own and operate income-producing real estate – comprise of a pool of property assets that pay out dividends to its investors. When inflation rises, property prices and rental income will also rise.

REITs offer high yields and higher taxes are charged for REIT dividends as a high percentage of them are considered ordinary income.

Rent and property prices usually adjust upwards rapidly, counteracting inflation. But, real estate is too expensive for many investors, which is why REITs are a popular option.

Value stocks

In this context, value stocks (security trading at a lower price than what a company’s performance may indicate) are better than growth stocks (any share in a company that is predicted to grow at a rate above the average growth for the market).

This is because value stocks are thought to trade below what they are really worth and therefore should provide a superior return. Growth stocks generally do not pay dividends.

Value stocks provide some hedge against inflation because a company's revenues and profits should grow with price increases after a period of adjustment. This would be a long-term strategy rather a short-term one, as stocks often lose value in real terms.

Find out more about how inflation affects the stock market

Inflation-linked bonds

Inflation may inhibit fixed-income investments, reducing their purchasing power and cutting real returns over time – even if the inflation rate is relatively low.

These bonds could help to hedge against inflation risk because their value increases during inflationary periods. Two examples of inflation-linked bonds include UK index-linked gilts and US treasury inflation-protected securities (TIPS).

Learn how to hedge against inflation

How to trade in inflation-beating assets

Investing and trading are two very different methods to gain exposure to financial markets. Investors seek returns over the long term through buying and holding, while traders speculate on rising and falling markets over the short term. With IG International you can only trade via CFDs.

Diversifying your portfolio can be beneficial, as it can limit your exposure to a single type of risk. Your diversification can either be based on asset types, ways to trade, or different industries – to name a few.

To get exposure to inflation-beating assets on the world’s No.1 trading platform, open an account with us.¹ You’ll get access to our expert trade ideas and round-the-clock support.

How to trade inflation-beating assets

1. Create a CFD account or log in and go to our platform
2. Select ‘buy’ to go long or ‘sell’ to go short
3. Set your position size and take steps to manage your risk
4. Open and monitor your position

The dangers of hyperinflation

Hyperinflation describes situations where the prices of all goods and services rise uncontrollably over a defined period. In other words, hyperinflation is extremely rapid inflation and occurs when the rate of inflation grows at more than 50% a month.

Recent examples that serve as a reminder of the dangers of hyperinflation include Venezuela and Zimbabwe.

Latin America's largest migration in recent years was driven by hyperinflation, violence and food and medicine shortages as a result of years of political turmoil. One out of every three Venezuelans was food-insecure and in need of urgent food supplies, according to the World Food Programme (WFP).

The Zimbabwean dollar is no longer actively used as it was officially suspended by the government due to rampant hyperinflation, meaning that inflation levels almost doubled every day so that goods and services cost twice as much the following day. With an unemployment rate of more than 70%, economic activities in Zimbabwe virtually shut down turning the domestic economy into a barter economy.

More than a decade ago, Zimbabwe recorded the second highest incidence of hyperinflation in history. The country’s inflation rate for November 2008 was huge: 79,600,000,000% (or a daily inflation rate of 98%).²

Hyperinflation in Germany, 1923

Germany in 1923 is a well-known example of hyperinflation that helped create the appalling social conditions and gave rise to a radical fascist movement. The crisis was caused mainly by the Weimar government printing banknotes to pay striking workers in the occupied Ruhr.

As the printing of these banknotes was not backed by gold, it caused a rapid increase in both prices and wages by 1923.³

Prices out of control in Germany

• A loaf of bread – which cost DEM250 in January 1923 – had rocketed to DEM200,000 million marks in November
• By September 1923, it cost more to print a bank note than the note was worth
• A wheelbarrow full of money would not even buy a newspaper
• The USD to German Mark exchange rate was one trillion Marks to one dollar⁴

The 1973 oil crisis

In October 1973, the members of the Organization of Arab Petroleum Exporting Countries (OPEC) led by Saudi Arabia, proclaimed oil restrictions on nations that had supported Israel during the Yom Kippur War. The constrained oil supply resulted in inflation and ultimately the oil crisis of 1973.

Canada, Japan, the Netherlands, the UK and the US were embargoed, and bans were also extended to Portugal, Rhodesia and South Africa. By the end of these restrictions in March 1974, the global oil price had risen by almost 300% – from $3 per barrel to almost $12 per barrel. US oil prices were also significantly higher.

The embargo caused an oil crisis with numerous short- and long-term effects on global politics and the global economy that was felt for years to come, including a second oil crisis in 1979.⁵

How to beat inflation summed up

• Inflation is a measure of the rate of rising prices of goods and services in an economy
• Hyperinflation describes situations where the prices of all goods and services rise uncontrollably over a defined period
• Some financial assets are inflation resistant, such as gold, REITs and value stocks
• You can get exposure to inflation-beating assets on the world’s No.1 trading platform by opening an account with us¹

Sources:

1. Best Finance App, Best Multi-Platform Provider and Best Platform for the Active Trader as awarded at the ADVFN International Financial Awards 2024.
2. Corporate Finance Institute, 2022
3. BBC, 2022
4. Alpha History, 2019
5. Office of the Historian, US Department of State, 2022