Take advantage of the Inflation cycle, instead of being taken advantage of!

I realize that with the current inflation rate running at about 2% per year, people don’t get too excited about it. But the time will come when the inflation rate is much higher, and you will be wishing for the good old days of 2% inflation. The question is, how can we prepare ourselves to take advantage of the coming inflation wave, instead of doing nothing and allowing it to take advantage of us? The answer is there are several things to consider, and to position yourself with respect to future inflation, like: Interest rates, Investments, Commodities, and Real estate.

Interest rates and inflation follow a parallel path, in terms of the synchronization of their cycle – when inflation is high, interest rates are high, and when inflation is low, interest rates are low (typically). This means that if interest rates are at historically low values, which they are, then they have only one way to go – UP! If you have any long-term loans or mortgages which are currently not fixed rate, then you should take action now to lock in that low fixed rate loan. Otherwise, you will wish you had when you can no longer obtain a 4% APR (or lower) loan.

Investments will be significantly affected by inflation. The stock market usually reacts negatively to periods of heavy inflation, so you may want to position yourself carefully in the near term to adjust your investment balance. “Paper” investments, like stocks, bonds, and cash, usually do poorly during times of significant inflation, and “Real” investments, like real estate, commodities, and collectibles, usually do well during such times.

Food Inflation

Commodities are things that we use in our everyday lives, like food (fruits, vegetables, and meat), fuel (gasoline, fuel oil, and natural gas), and metals (silver, gold, and platinum). With food and fuel, it is difficult to store any quantity that would be enough to offset the eventual rise in cost of these commodities. However, you could start your own vegetable and fruit garden to provide a sustainable and cheap insurance policy against future price increases. With fuel costs, you may want to consider trading in your gas guzzling SUV for a hybrid or electric vehicle. Finally, with respect to metals, you should think about allocating some portion of your investment portfolio in the most inflation resistant metal there is – gold.

Real estate, like gold, is another great inflation hedge. If you are fortunate enough to own your home (vs. renting), you already have a lot going for you. If you currently rent, you may want to revisit that trade-off in the near future, and consider how rising rents and other inflation effects could affect your monthly cash flow down the road. In addition, buying investment property and becoming a landlord isn’t for everyone. But in terms of passive income and a hedge against inflation, there are few alternatives that can beat it.

Take advantage of the coming increasing wave of the Inflation cycle, instead of being taken advantage of!