How can traders beat inflation?

Around the world, inflation rates are surging, rising to near unprecedented levels. Last month, it was revealed that inflation in the UK had surged, hitting a 40-year high of nine per cent. What’s more, inflation in the Eurozone hit a new record high of over eight per cent, while the Federal Reserve recently raised its benchmark policy rate by 0.75 percentage points in an attempt to combat the highest US inflation in 40 years.

In terms of what has caused the rate of inflation in countries across the globe to rise so significantly, the ongoing conflict between Russia and Ukraine has been a major contributing factor. As both nations are key suppliers of a range of commodities, ranging from oil and gas to corn and wheat, the conflict has disrupted the supply of both hard and soft commodities. As such, the prices of these commodities has increased, leading to, amongst other things, rising energy bills and prices of food, thus causing a sharp rise in inflation levels.

Yet even with these record-breaking highs, there remains a sense that we’ve not hit the peak. Inflation rates may yet rise further, with experts in the UK predicting that it may exceed 10 per cent once the energy cap is raised further in October. As such, with an extended period of high levels of inflation looking like an inevitability, it is vital for traders to be aware of areas they should invest in and strategies they can deploy in order to combat or beat rising inflationary rates.

Commodities

Investing in commodities is a useful strategy to hedge against inflation. In years gone by, when inflation rates have increased, investors have often turned to tangible assets likely to rise in value, such as commodities. Commodities tend to be one of the asset classes that is most positively correlated with inflation.

As the demand for goods and services increase, so too does their price. In turn, this means that the prices of the commodities in manufacturing those goods and services also rises. Evidence of this can be seen with the Bloomberg Commodity Spot Index, which tracks the prices of 23 raw materials including crude oil, corn and sugar, rising to its highest-ever level in early June. As commodity prices tend to rise when inflation surges, investing in commodities can protect traders’ portfolios from rising inflation.

Gold and Silver

As for gold and silver, investing in this pair is a worthwhile strategy when it comes to beating inflation. The value of these precious metals tends to increase when the purchasing power of currencies such as the US dollar decline. This is because physical precious metals such as gold and silver derive their value different than paper currency. For example, the value of the dollar is entirely dependent upon the actions of the US federal reserve, central banks and the general wellbeing of the economy. In contrast to this, gold and silver have value due to their many modern uses. Both of these precious metals are highly conductive, making them instrumental to countless electronic applications. What’s more, the two precious metals hold a great deal of symbolic value, being used as a sign of wealth for thousands of years. There is no reason to believe that the desirability for gold and silver will decrease in the near future.

During times of economic turmoil, when the value of currencies plummets, investors flock to stable investments like physical gold and silver in order to stockpile their wealth. Therefore, this increased demand boosts the prices of gold and silver, helping to provide traders with a way to hedge against continued elevated inflation.

Property

When it comes to real estate, property prices tend to move in one direction – upwards. According to Halifax, UK house prices are rising at their fastest rate since 2007, prior to the financial crisis of 2007–2008. While there have been instances in history where property prices have come crashing down, like during the period in which the aforementioned financial crisis took place, they often bounce back both quickly and sharply.

As a hedge against inflation, there are a number of advantages to investing in real estate. Regardless of the economic climate, there will always be a demand for homes, making this asset a safe investment. What’s more, as inflation rises, so to do property values. Therefore, this enables landlords to charge more money for rent, while those selling properties can demand a higher price for their real estate. Traders can also look into real estate investment trust (REIT) products, which is essentially a portfolio of various properties. The REIT’s value is unlikely to be impacted by rising levels of inflation as their operating costs will remain largely unchanged.

While this may be an exciting time to be entering the trading world, investing is not a risk-free activity, as shown by the recent surge in inflation rates in countries around the world. However, by choosing to invest in financial assets which are relatively resistant to inflation, such as commodities, gold and silver, and property, traders can beat the risk posed by rises in inflationary rates.