Real wages decreasing is probably not something the average person thinks about, but in addition to the cost of nearly everything continuing to increase, inflation is eroding the value of our paycheck and making us all poorer.
During the last period of high inflation, it took former Fed Chair Paul Volker 4 years to get inflation from 11% to 4% (from 1979 to 1983) and about another 10 years to be consistently around the 2% target. It’s going to be a long road! So what do you do as an investor? We’ll get to that in a second.
US household debt is the highest since 2008 due to inflation and real wages going down. Inflation is now at 6.4%, but food is up 10.1%. Average credit card debt went from $8,500 to $9,300 in 18 months. Americans continue to spend, however. Spending $1,549 (up 24% over last year) just on holiday shopping. The average time expected to pay it off if more than 5 months went from 28% to 37%.
Look at the Fed graph below. Americans were pretty good savers during the Covid years, but now we’re not saving nearly as much. It’s down to 3% on average, which is why we see total debt going up. People are hurting. The cost of everything is rising and real wages, that is wages minus inflation, are going down.
Go ask for a raise or get a new job! You’re losing money if your income isn’t going up by at least 6%.
Consumer spending is still high, despite fears of a recession and all the bad economic data. Who is doing all this spending? Gen Z and Millenials. That could likely lead to a recession and extend higher interest rates.
The Fed is having a tough time taming inflation partly due to high spending, which keeps the job market strong and pushes up prices, which leads to inflation. If the Fed had it their way, everyone would stop spending to slow down the economy and bring inflation down.
So what can you do besides ask for a raise? Let’s talk about the best investments to have during periods of high inflation.
There is no one-size-fits-all answer to this question, as the best investment for long-term inflation will depend on a variety of factors, including your personal financial goals, risk tolerance, and investment horizon.
However, there are a few types of investments that may be well-suited for long-term inflation protection:
Stocks: Historically, stocks have been a good hedge against inflation, as the value of companies tends to rise with inflation. Investing in stocks over the long term can help you stay ahead of inflation and potentially achieve long-term growth.
Real Estate: Real estate can also be a good hedge against inflation, as the value of property tends to rise with inflation. Investing in real estate can provide long-term growth potential and can also provide rental income.
Commodities: Commodities such as gold, oil, and agricultural products can also be a good hedge against inflation, as their prices tend to rise with inflation. Investing in commodities can provide diversification to your portfolio and can help protect against inflation.
Treasury Inflation-Protected Securities (TIPS): TIPS are bonds issued by the U.S. government that are designed to provide a hedge against inflation. TIPS pay a fixed interest rate, but the principal value of the bond adjusts with inflation. Investing in TIPS can provide a reliable source of income and help protect against inflation.
It’s important to remember that all investments come with some level of risk, and it’s important to do your own research and consult with a financial advisor before making any investment decisions. Additionally, diversification is key to managing risk in any investment portfolio.
Real estate can be a good investment during high inflation for several reasons:
Appreciation: Inflation can drive up the value of real estate over time, as the cost of construction materials, labor, and land tends to rise with inflation. This means that the value of real estate investments can increase along with inflation, providing investors with a hedge against inflation.
Rental Income: Real estate can provide a steady stream of rental income, which can help investors maintain their purchasing power even in a high inflation environment. Rental income can be adjusted upwards to keep pace with inflation, which can help maintain the value of the investment.
Fixed-Rate Mortgages: If an investor has a fixed-rate mortgage on a property, the mortgage payments will stay the same over time, even as inflation drives up the value of the property. This means that investors can benefit from the appreciation of the property while paying the same amount on their mortgage each month.
Tangible Asset: Real estate is a tangible asset, which means that it has inherent value beyond its financial value. This can provide some protection against the erosion of purchasing power that inflation can cause, as investors can always fall back on the intrinsic value of the property.
Of course, as with any investment, there are risks involved in investing in real estate. Real estate markets can be volatile, and property values can fall as well as rise. Additionally, owning and managing real estate can be complex and time-consuming. As always, it’s important to do your own research and consult with a financial advisor before making any investment decisions.
Inflation can increase the price of goods and services, which can lead to higher profits for companies that sell those goods and services. This can cause the stock prices of those companies to rise, as investors anticipate higher earnings and future growth.
As inflation erodes the value of currency over time, the value of a company’s assets, such as real estate or equipment, tends to increase. This can cause the value of the company to increase, leading to higher stock prices.
Stocks also provide the potential for long-term growth and capital appreciation. While inflation can erode the value of currency over time, it can also lead to higher prices for stocks over the long term, providing investors with a potential hedge against inflation.
Of course, it’s important to remember that stocks come with risks, and there are no guarantees that any investment will perform well, especially during periods of high inflation. It’s important to do your own research and consult with a financial advisor before making any investment decisions.
Additionally, diversification is key to managing risk in any investment portfolio.
One thing seems pretty likely, inflation is going to be here for awhile, so consider buying the assets that will do the best.
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