Protecting investments from inflation

Time marches on, and often, so does inflation. Since the turn of the millennium, the inflation rate in the United States has typically bounced between 1.5 and 3.5 percent. As of July, however, the Consumer Price Index had increased 5.4 percent over the last 12 months.

Amid an increasing money supply and U.S. Federal Reserve stimulus efforts, some analysts fear sustained high inflation. To keep up with inflation, investments should gain from 4 to 6 percent each year.

In the past few years, investments such as 401Ks have risen much more than that, with gains of 20 percent and more.

But we may be entering a new era of inflation, although some analysts believe inflation will slow down as the economy recovers from a shutdown.

Still, it is a good time to review investments.

Jonathan Golub, an inflation expert at Credit Suisse, notes that stocks tend to do well even during periods of rising inflation. Stocks in some sectors, such as energy, may outperform markets.

Meanwhile, some investments may underperform. Some consider long-term bonds, in particular, to be poor investments amid high inflation. Speaking to CNBC, financial adviser Doug Bellfy suggests investors “avoid any investments that have ‘long term’ in the name.”

In a letter to shareholders this year, famed investor Warren Buffet also warned that “bonds are not the place to be these days.”

Shifting investments from bonds to stocks and other assets may reduce the risks posed by inflation.

Buy a house now at low-interest rates instead of renting. Rental prices will rise with inflation, but your mortgage payment will rock on at a low-interest rate regardless of inflation, and meanwhile, its value could increase with inflation.

Supply chain disruptions have also led to increasing prices. If you can hold off on buying a car, computer, and other goods selling at historical highs, you could protect your bank account. Computer manufacturer HP has increased printer prices by 20 percent and computer prices by 8 percent amid chip shortages.

Meanwhile, Edmund’s found that in the second quarter, the average transaction price for a used car had increased 21 percent from a year prior. New cars have likewise been selling at high prices, up 8.4 percent in the first quarter from a year ago, according to JD Power.