Global Inflation: Potential Investor Hedges

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Inflation in many developed countries and emerging economies has been increasing at a fast pace during what could be considered the aftermath of the pandemic.

This phenomenon was largely unexpected and could be attributed to the confluence of multiple factors that were caused by the health crisis and, to some extent, to the response of policymakers.

In this article, we dig deeper into the reasons why inflation is surging while also giving investors some tips in regards to how they can hedge against erosion in the purchasing power of their assets.

#1 – Supply chain bottlenecks

As economies have progressively reopened, factories have been overwhelmed by a rapid spike in the demand for their products as consumers have resumed most of their regular pre-pandemic activities.

This has caused bottlenecks at multiple levels going from the manufacturing plants to the businesses responsible for shipping and transporting those goods to their endpoint.

Meanwhile, labor shortages have exacerbated these issues as certain sectors of the economy are struggling to find qualified workers to perform key jobs as they went on to find other sources of income during the pandemic or, in some cases, they are still relying on government aids and not actively looking for a job.

#2 – Ultra accommodative monetary policies

The largest central banks across the world including the United States Federal Reserve, the Bank of Japan, and the People’s Bank of China adopted highly accommodative monetary policies to avoid the collapse of the financial markets during the pandemic.

They did this by injecting trillions of dollars into the markets to buy distressed assets and provide the world’s largest corporations with the funding they needed to withstand the crisis.

As a result, the global monetary base expanded significantly and that is pushing the price of hard and financial assets higher.

From real estate properties to stocks to used vehicles, the consequences of these accommodative policies are starting to surface and one of the ripple effects is higher inflation.

#3 – Higher commodity prices

The supply chain bottlenecks mentioned above have put pressure on a key variable that shapes the price of finished goods – the cost of raw materials.

Starting with higher oil prices – which have risen above the $80 level for the first time in years – to elevated prices for wood, corn, wheat, and oats, most corporations have been reporting a steep increase in the cost of these crucial items.

As a result, companies are obligated to pass on these costs to consumers in the form of higher prices to keep their profit margins from suffering.

How can investors hedge?

As the world continues to navigate these complex economic conditions, investors might be wondering how they can protect their holdings from being affected by a reduction in the purchasing power of top fiat currencies such as the US dollar and the euro.

The answer to this question is not as straightforward as some may expect since different types of asset classes respond differently to inflationary pressures. (For a selection of the best brokers please see the compilation provided by BrokerReviews.com.)

In essence, investors should allocate a portion of their portfolios to assets that are considered a store of value. These assets are those whose value increases at the same pace – or faster – than inflation does, producing neutral or positive real returns.

Gold has typically been a top pick for this particular task as the value of the precious metal has kept up with inflation in the past. That said, its performance has not been linear and, therefore, it cannot be considered a perfect hedge.

Another alternative is stocks and hard assets such as real estate as the value of these investments tend to outpace inflation in many cases.

In the specific case of stocks, companies that can pass on price increases to consumers without experiencing a decline in sales volumes are the ones that will perform better in a scenario of elevated inflationary pressures.

For real estate properties, those that are highly demanded will typically keep rising to the point that the percentage increase in their value either matches or outpaces that of the consumer price index.

Some of the investments mentioned above can act as a hedge against inflation. Even though these are not always perfect hedges, they are better alternatives to other assets such as bonds, certificates of deposits, and cash as those stand to lose the most in an inflationary environment.