Investing In Today’s Inflationary Environment: What Investors Need To Know

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Investing when inflation is rising is of particular importance since the goal is to earn a positive return, after factoring in inflation.

This is known as the real return. Where can you invest to beat inflation? What types of investments offer the best opportunity to stay ahead of rising inflation?

Perhaps the most reliable investment designed to outpace inflation are TIPS or Treasury Inflation Protected Securities. TIPS are issued by the U.S. government and carry the same protection against default as other treasury securities. While TIPS are low risk, they are bonds and, like bonds, their performance is affected by changes in interest rates. Let’s look further at how these securities work.

Most bonds carry a fixed rate of interest known as the coupon rate. Thus, if interest rates rise, your bond will still pay the same, albeit lower rate. Because your bond pays less than newly issued bonds , the price of your bond will decline. Investing in a fixed-rate security such as this when interest rates are rising is generally unadvisable.

TIPS are different in that the price of these securities will rise with inflation as measured by the CPI. This boost in price will help to offset the effects of rising interest rates. As long interest rates don’t rise too far too fast, TIPS should produce a positive return after inflation. The ideal time to invest in TIPS is when interest rates are in the upper part of the normal range.

Other investments to consider during inflationary times are gold and silver. While neither offers a guarantee against inflation, at times, both do well when prices are rising. Why? It all depends on how investors view these commodities. If the consensus is that gold will rise when inflation rises, then they will buy it, creating strong demand, which will push its price higher.

 

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