How to Profit from Inflation

Unless you’ve been living under a rock, you probably know that inflation is on the rise. Words like inflation, recession, and depression can make most people think of times in which it’s hard, if not impossible, to find financial success. But contrary to popular belief, there are ways to profit during times of rising inflation.

How to Profit from Inflation

1. Invest in Recession Proof Stocks
2. Start a Recession Proof Business
3. Real Estate
4. Short Sell Stocks
5. Find Low Risk Investments
6. Tax Liens
7. Commodities
8. Cryptocurrency
9. Digital Assets

The essence of good business advice is to, “buy low and sell high.” When consumers have money, this adage seems to work well. Stocks soar, retirement accounts swell, and people have extra money to eat out and go on vacations. All this spending activity stimulates economic growth, which bodes well for everyone trying to make money.

But what happens when each and every dollar loses some of its purchasing power? People tighten their wallets. They spend less, cutting out consumer discretionary spending. The economy stagnates. And the old adage of “buy low, sell high” becomes harder to implement because people are struggling.

What is Inflation?

Inflation does not mean that your money loses value. A dollar is still a dollar, despite inflation. What it means, rather, is that the purchasing power of the dollar declines. And despite the fact that inflation has accelerated in the past two years, it is not a new trend.

Take a cup of coffee, for example. In 2019, the average cup of coffee cost around $1.59. In 2010, it cost $1.25. In 2000, it cost $1. And if you go back to 1970, it cost just $0.25. As much as that validates the complaints of senior citizens who fondly recall the time they could see a picture-show for a nickel, you might still be wondering: what caused this increase in prices over time?

Inflation very much relates to the natural laws of supply and demand. The more you have of something, the more its value goes down.

How Does the Consumer Price Index Work?

The most common metric for measuring inflation is the consumer price index. This index tracks typical commodity items, like food, along with necessary services, like transportation and medical care. As we are seeing higher prices for gas, groceries, and other services, it becomes clear we are entering an inflationary environment. The rising cost of these everyday items bodes poorly in terms of personal finance for everyday people, but it might surprise you to learn that financial opportunities can coexist with inflation expectations.

As a side note, the use of the consumer price index and its suggestion of rising prices is debated in terms of his exactitude for truthfully reflecting rising inflation. The goods and services used by Morgan Stanley may be different than those used by the Wells Fargo Investment Institute, which may in turn be different than those used by the government. But suffice it to say, though the exact mix of goods may differ, there is no denying that consumers will be confronted with the reality of an increasing inflation rate eating into their fixed income.

The 3 Types of Inflation

Economists have organized the causes of inflation into three groups. Demand pull inflation occurs when an increased money supply stimulates consumer demand beyond the economy’s production capacity. In terms of supply and demand, the demand is outpacing supply, which means the prices of everything increases. Cost push inflation involves an increased supply of money, leading to speculation in the commodities markets that drives up the prices of goods. This increased cost works its way through the supply chain until consumers are presented with increased prices. Finally, there is built in inflation, which is described as a wage-price spiral where increasing prices push a demand for higher wages, which in turn drives up the cost of goods.

Some economists will point to other factors that drive inflation, namely the severing of the dollar from the gold standard. In times past, each and every dollar represented an actual piece of gold. These economists argue that because gold is a precious metal that has been used as currency for time immemorial, its connection to the dollar was a stabilizing force. And ever since the government severed the gold-dollar connection at the turn of the 20th century, inflation has increased at a more rapid pace.

Some economists even suggest that the policies of central banking have contributed to inflation, while others insist that central banking (like the Federal Reserve) is what keeps inflation under control. The arguments to either side are beyond the scope of this article, but suffice it to say that inflation is a very real phenomenon, one that readers are tangibly experiencing.

How to Profit from Inflation

While inflation is a normal part of any economy, there are some inflation hedge tactics to help you make money, including:

1. Invest in Recession Proof Stocks

The everyday retail investor tends to think of Wall Street as a place where successful investors in fancy suits are buying and selling stocks every minute, or placing one lucky trade that “blasts off to the moon.” However, that type of speculation is typically a bad idea for most investors. Instead, it’s better to purchase stock in companies that are recession proof by nature.

These growth stocks tend to be consumer staples, have a reputation for excellent management, minimal amounts of debt, and a large presence in the market space. They have a record of stable growth over the years, even during bad economies.

Think of companies like Coca-Cola, Johnson & Johnson, and Wells Fargo. Food, household items, and banking services are not going away anytime soon. In some cases, these businesses may even do very well during a recession, as they tend to increase their prices.

Either way, consistently investing in recession proof stocks is a safe bet no matter how the economy is doing.

2. Start a Recession Proof Business

If you are business-minded or of an entrepreneurial spirit, now might be the time to start a recession proof business. If your business needs a brick-and-mortar presence, you might be able to find a wide range of available spaces from businesses hit hard by the recession that needed to vacate. Landlords with empty retail pads will be more open to striking a favorable deal rather than losing potential tenants.

As a general rule, a good entrepreneur looks for opportunity wherever they can find it. Some businesses by their very nature are going to be recession proof because people always need them. Accounting, consulting, IT services, and similar service-based businesses are always going to serve consumers who will still be saddled with the necessities of filing their taxes, keeping their business afloat, or maintaining the cogs of their digital machines. People still need childcare. People still need their haircut. And while some businesses may be hit hard by an increase in fuel prices and decreasing consumer demand for delivered food, other opportunities are abound.

3. Real Estate

You might not think that investing in real estate when money is tight is a good idea. But regardless of market patterns, real estate is almost always going to be classified as a low risk investment.

Land is a stable asset that they’re not making any more of, which means it almost always presents excellent opportunities for growth over time. During periods of inflation, you might be able to find buyers who are especially motivated to sell their home in order to cash out and downgrade their living arrangements to something more retirement friendly, especially because inflation can drive up housing prices.

As you drive around town, be on the lookout for real estate signs, and especially those classic red FOR SALE BY OWNER signs. Keep in mind that interest rates for mortgages will rise during inflationary periods, which may also work in your favor if you can sidestep the morass of institutional banking and use some of the creative funding sources real estate investors are known for.

If you have cash in hand or can close quickly, you’ll beat out consumers who can’t get a mortgage or who find the higher interest rate cost prohibitive. If you already own real estate and have tenants, you can also pass on the costs of inflation by increasing rent prices to offset increased maintenance costs and stimulate cash flow.

Learn more about the many ways real estate can hedge against an inflationary environment in our weekly real estate investing room.

4. Short Sell Stocks

Not all stocks are recession proof. There are many stocks that are going to tumble during a period of higher inflation, especially ones tied to consumer discretionary industries, like dining and entertainment. This might be an excellent opportunity to exercise a short selling strategy.

Short selling a stock involves borrowing the stock from your broker or brokerage, selling it at the market price, and then (as the price continues to drop) buying it back to return it to the broker. In order for this to work and pocket the difference, you need the price to continue falling. Though it sounds simple, the strategy will require you to have clearance from your broker to borrow stocks, which may in turn require you to furnish proof of trading experience or have a certain amount of capital on hand.

Investing during inflation does not always require using money to exercise a normative purchase. Sometimes it involves creative strategies, like short selling stock or experimenting with options trading. But with a little self-education, you can master these strategies and exercise them during periods of inflation or reduced economic activity.

5. Find Low Risk Investments

Low risk investments may offer less potential return, but there is also less likelihood of losing your money. Low risk investments often have underlying values that are not disproportionately impacted by market activity, although the buying and selling of interested parties will still impact their pricing to some degree.

The aforementioned investments of real estate and stocks issued by companies in the consumer staples space are classic examples of low risk investments. Keeping your cash as cash is also extremely low risk. The problem here is that during periods of inflation, your cash is losing its purchasing power. Now might be the time to consider low risk investments, like precious metals or government bonds.

In regards to precious metals, inflationary periods are typically times when their value skyrockets. The drawback, of course, is finding a reliable place to buy them, as gold and silver are no longer commonly exchanged in consumer facing venues. There are plenty of services that will take a pre-set amount of funds from your checking account on a regular basis and exchange them for gold or silver that they securely store. After two years of putting away $80 or so per month, you’d own a solid ounce of gold. As you can see, it takes a bit of time to get to that point, but perhaps a period of inflation is the jumpstart you need to consider such an investment.

As for bonds, these are essentially certificates of debt issued by the government to lenders, including everyday consumers. Because the government is extremely unlikely to default on its obligations, these types of investment are considered very secure, and you will likely recognize financial gain from the interest they accrue. Some bond types, like treasury inflation protected securities (TIPS), actually increase in value with inflation, and may be a good asset class to include in your portfolio anytime an inflationary period occurs.

6. Tax Liens

Have you ever wondered what would happen if you didn’t pay your property taxes? The government will put a lien on your property, and sell the privilege of collecting back taxes to someone else.

These tax liens are sold at auction on a marketplace open to everyone. If you’re on the purchasing end of this arrangement, you can head to your local county’s website and see a number of properties for sale with available tax liens for purchase. If the owner pays you what is due, plus interest, then all is well and good. If not, though, it’s an even better deal for you because you now get to keep the property!

Periods of recession or high inflation may be excellent times to look into tax liens because, as unfortunate as it is, many homeowners will be put into situations where they cannot meet their financial obligations. Rather than have the bank foreclose on their home for defaulting on the mortgage, they may choose to skip paying taxes and hope for the best. In this instance, it’s an opportunity to acquire some very cheap real estate. However, purchasing tax liens can be rife with potential complications, especially if other lenders have a claim on the property.

7. Commodities

Commodities are the raw materials that go into the supply chain of making goods. Think gas, metals, plastics, and precious metals. Remember that one of the key causes of inflation is increased demand and/or limited supply, along with potential speculation in the marketplaces of the material goods themselves. This is good news for investors looking for an opportunity to make a profit.

If you’re not familiar with how to trade on commodities marketplaces, there are a number of ETFs (exchange traded funds) that you can purchase on the regular stock market that can realize serious growth. If you have a trading app or brokerage platform, like Robinhood or TDAmeritrade, all you have to do is search for something like “commodities” and it will show a number of ETFs to invest in.

Keep in mind that while inflation may drive up the price of goods and bode well for commodities investing, it can be extremely volatile—far more than stock investing. Only experienced investors should use them as an investment vehicle.

8. Cryptocurrency

You’ve probably heard a lot about cryptocurrency lately, but maybe you’ve been reluctant to get into it. As the purchasing power of the dollar decreases, you may find that digital currencies are on the rise. Apps like Coinbase or Crypto.com have made buying, selling, and owning digital coinage a lot easier and more accessible.

There are also a number of other types of projects in the so-called crypto space, such as nodes, which offer the opportunity to purchase a share of the blockchain that makes a given cryptocurrency work. In return for investing in these nodes, it will produce a certain number of coins (or fractions of a coin) each day, which you can then reinvest to exponentially grow your nodes or cash out into fiat currency.

The crypto space is still relatively new and unregulated, so the opportunity for huge wins and huge losses is a factor, along with unscrupulous players who will attempt to hack into your wallet and steal its coins. It’s a lot to take in, and requires a significant amount of research, but there are plenty of articles and resources to help you get started.

Moreover, it will only be a matter of time before more businesses start using crypto for B2B transactions. There are even financial services companies that are making it part of their retirement planning products.

9. Digital Assets

Similar to crypto, there are other digital assets you can invest in as well, such as NFTs and digital real estate. It may sound silly (and in some cases, it is), but digitally produced doodles may be the next great piece of art that takes the market by storm.

NFT stands for non fungible token, and it’s basically a digital asset with a unique signature that cannot be duplicated (unless a number of them are being sold by the artist). These NFTs may be a piece of art, a video, a recording, or whatever else the artist has made. They are traded on a marketplace, which impacts their value in addition to their inherent worth.

If you have doubts about this new space, keep in mind that some of these NFTs are selling for millions of dollars. The downside is that the market is saturated with a lot of mediocrity that will eventually dissipate into nothing, so for many NFT traders, it’s just about the luck of the draw.

Another avenue to explore is the growing potential of digital real estate. Meta (formerly known as Facebook) launched its meta-verse, a digital space where you can acquire digital land, goods, and services. The technology is pretty new, so its potential is unknown, but some experts predict that a small plot of digital land worth $5 today may be worth thousands in the future. We don’t recommend investing a ton of money in this venture, but it could be a fun, low-cost way to get in early on an experimental opportunity.

Money is Tight During Inflation, But There Are Still Ways to Profit

Inflation risk is always present, but sometimes an acute crisis, like a war in Ukraine or political policy changes, can lead to a rapid increase in inflation. You’ll often hear retail investors complaining that their investment portfolio is taking a hit, and while that is a risk with any investment, there are ways to hedge against it to stem losses.

Generally speaking, sound wealth management is prepared for almost any scenario, and inflation protection is one of them. Even if inflation starts to fall in the next few years, it would still behoove you to build strategies into your investments, like value stocks, that won’t get rocked by the waning purchase power of consumer dollars.

Additionally, if you have the know-how and/or capital, you can find a silver lining in this cloud by doing things that take advantage of inflationary market conditions, like investing in rental real estate or exploring emerging markets, like digital assets and crypto.

Sign up for a free Infinity Investing membership today for more expert-driven investment advice that will help you create a balanced portfolio that thrives, no matter what is happening with the economy.

Bonus Video: