This protects investments against current inflation (and what may come)

Year-on-year inflation for March was almost 10%. It is also higher than the inflation of other European countries. This strongly affects the level of our investments. If we had 100,000 euros in March 2021, in March 2022 it is better that we have taken 10,000 euros of profitability just to maintain purchasing power.

Given these scenarios of high inflation, it is necessary to have a strategy to protect savings from inflation, any other option is to lose money. A few years at this rate and our savings will be worth half or even less. It is true that there are special circumstances (recovery from the pandemic, energy crisis and war in Ukraine), but we do not know how long it will last. It is necessary to take into account inflation now, and more so when investing.

Although we have discussed how to protect savings against hyperinflation and economic depression, the current situation does not reach these extremes, so other options can be seen to protect our savings at a time of high inflation.

Consume in times of high inflation


In this regard, when consuming, we have to review our future needs and if we are able to buy it now. We have to understand that everything goes up. Personally, I am doing some shopping for my home, and in different businesses we have been notified of the inability to maintain budgets. The rise in the prices of materials and components makes us interested in considering advancing purchases. At the macroeconomic level this is not good, because it accelerates inflation, but at the individual level it is what may make the most sense.

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On the other hand, at this time if we defer payments to the end of the month with the credit card (at zero interest), we can obtain a small discount on the real price. To this in Argentina they call it “the blender”.

It is also very important consider taxation. If our income rises with inflation but taxes are not lowered, the salary increase will not give us greater purchasing power, because part will go to finance public spending.

Finally, let’s consider this. Although buying a home is a decision that must involve many more considerations than a month’s CPI, rents are updated with the CPI according to almost all rental contracts, while if we have a fixed-rate mortgage, it will not rise regardless of inflation, and it is that we already recommended “at a fixed rate” for a long time.

Invest in times of high inflation


Apart from having a home, what can we invest in in times of high inflation? Well, there are several options.

Many recommend investing in real assets, such as real estate, gold, silver etc. One advantage is that it is easy to get into debt for the purchase of real estate and that allows us that the value of what we return in real terms will be less than what we bought it for. If the asset is also appreciated with inflation, the deal is round. Even so, borrowing in times of uncertainty is a decision to consider very seriously, since it is riskier.

It is important to consider that these types of products have more influence on their price than inflation itself. Buying a business premises in a declining area (some shopping centers, for example) leads us to have an asset that has two reasons to depreciate, inflation and the risks inherent to the asset. It is true that gold tends to maintain its purchasing power, but it does so over decades.

Regarding cryptocurrencies, The first thing is to consider that not all cryptocurrencies are the same, many are basically the classic “pump and dump” movement, that is, create it, inflate its price and place it on the sidelines while running away with the profits. The second thing is to consider that it is a very recent asset and we do not know how it will work in the long term.

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You also have to consider equities, We have already talked in the book about investing in times of low interest rates, practically everything that is said is applicable here. Equity is something to consider because it should be updated with inflation, but in the short or medium term its value can be negatively affected by inflation.

A piece of advice that is given a lot in times of inflation is that we should Avoid fixed income. That is not entirely correct, we must avoid certain types of fixed income. We must avoid fixed income that gives a return below inflation or not linked to inflation. A lesser-known exception is inflation-linked bonds, in English TIPS, acronym for Teasury Inflation Protected Securities.

These types of products are increasingly popular, between 1997 and 2006 the total debt issued through these products increased fivefold, as stated Juan Ángel García of the European Central Bank in this article from 2008 (which I recommend to anyone who wants to delve into it). There are even finvestment funds specialized in this type of product. However, TIPS are not perfect and would not perfectly cover us from high inflation and even less so from hyperinflation. In addition, they do not usually cover the inflation rate in Spain, which is what interests us the most.

Every asset we put our hands on to hedge against inflation has its pros and cons, as a conclusion, and they should be carefully considered. None of the options considered above is an investment recommendation.

Ask the readers what are they doing to protect their savings from inflation?

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