What To Buy In A High CPI Environment

Is inflation messing up your nest egg? If yes, you are not alone. The market has been weak since inflation kicked into high gear in the second half of 2021. More than a year later we are still dealing with extreme price increases and reduced balances on our brokerage accounts and 401(k)s.

Fortunately, there is still time to add inflation-resistant assets to your portfolio. A good mix of asset classes can smooth out your volatility both for the remainder of 2023 and well into the future. Read on to learn what causes inflation and which assets perform best when prices rise.

What causes inflation

Inflation is caused by a mismatch between supply and demand. This discrepancy can arise on the demand side or the supply side.

demand-pull inflation

demand-pull inflation occurs when consumers want more stuff than manufacturers can supply. You see this happening regularly in the real estate market. Home prices rise — sometimes in crazy ways — when there are more homebuyers than available homes. Demand-pull inflation is a similar dynamic that just spreads across the economy.

The underlying causes of demand-pull inflation include sweeping changes in consumer preferences, stimulus programs that put more money in people’s pockets, or low interest rates that allow for cheap borrowing.

cost pressure inflation

cost pressure inflation begins with supply shortages that occur while demand remains strong. Supply bottlenecks have their own causes. Most of them come with higher costs for raw materials and labor. Manufacturers then pass these costs on to consumers in the form of higher selling prices.

Pandemic Inflation Factors

The big burst of inflation we are now witnessing has its roots in both demand and supply. Factors at play include:

  • Preserved spending demand after the 2020 pandemic lockdowns
  • Pandemic related stimulus payments
  • Ongoing supply chain disruptions due to the pandemic
  • The Great Resignation and its Impact on Labor Supply and Workers’ Wages

Unfortunately, inflation cannot be solved easily or quickly. Price increases continue until demand cools to meet supply or until supply increases to meet demand. Also, know that prices don’t usually fall once the inflationary environment is over – they just stop rising so quickly.

With inflation at more than 6.4% at a 40-year high, dividend stocks offer one of the best ways to beat inflation and generate a reliable income stream. Download “Five Dividend Stocks to Fight Inflation,” a special report by Forbes dividend expert John Dobosz.

Best investments for inflationary times

Some assets outperform under inflationary pressures, others hold up and others fall. The challenge you face is balancing these different behaviors for good performance, regardless of what happens with inflation. Why? Because you can’t always predict when inflation trends will change.

For this reason, you should not go all-in on inflation hedges. You will regret it if inflation unexpectedly falls.

Keep that in mind as you review the following six investments. All play a role in an inflation-resistant portfolio, but some — like gold — are better in smaller doses.

1. Stocks

As reported by Forbes Advisor’s Bob Sullivan, the long-term average annual return of the S&P 500 is about 10%. According to the United States Bureau of Labor Statistics’ Consumer Price Index (CPI) data, the long-term average annual inflation rate is 3.5%. These numbers tell the story. Over the long term, stocks easily beat inflation.

What does this mean for your investment portfolio? A stable, long-term position in shares should protect your assets from rising prices.

Granted, that’s a hard truth to accept. After all, the stock market usually struggles while inflation is high. Remember that these cycles are temporary. Eventually, inflation will level off and the stock market will recover. Staying invested is the best way to participate in the growth that follows.

2. Dividend Aristocrats

Dividend Aristocrats are S&P 500 companies that have increased their dividends for 25 or more straight years. Examples are hardware stores lowes (LOW) and payroll processor Automatic data processing (ADP). Both companies have pushed through annual dividend increases for more than 45 straight years.

A reliable source of increasing income can offset some of the higher cost of living you experience during spikes in inflation. In the long term, you also benefit from price increases with these positions.

Know that Lowe’s or any other aristocrat can change their dividend policy. Dividend Aristocrats don’t often skip increases or cut their dividends, but it does happen.

3. Real estate

Real estate values ​​and rents typically increase with inflation. Your real estate portfolio should therefore increase in value and earnings potential with rising prices.

You can buy real estate to get these benefits, but you may not want to. Today’s high mortgage rates are a hindrance. In these uncertain economic times, you may also be reluctant to take on an expensive and illiquid asset.

Alternatively, you could invest in exchange-traded real estate funds or real estate investment trusts (REITs). include examples Vanguard real estate ETF (VNQ) and real estate income (O). Both offer exposure to real estate, but with more diversification, less exposure and a smaller cash stake than physical real estate.


Treasury Inflation-Protected Securities (TIPS) are US government bonds that are indexed to inflation. Their value increases as the CPI increases. Better still, TIPS interest payments also increase when inflation rises. This is because these interest payments are calculated by applying the bond’s coupon rate to the present value.

Unfortunately, TIPS are best bought before inflation sets in. Then you maximize the value of those inflationary capital adjustments. If you don’t have a working crystal ball handy, you might choose to consistently hold a small TIPS position – at least that way you’re prepared for the next inflation cycle.

With inflation at more than 6.4% at a 40-year high, dividend stocks offer one of the best ways to beat inflation and generate a reliable income stream. Download “Five Dividend Stocks to Fight Inflation,” a special report by Forbes dividend expert John Dobosz.

5. Raw Materials

Commodities are commodities such as corn, wheat, energy, precious metals, and livestock. Research from Vanguard concludes that commodities can rise 7% to 9% for every 1% of unexpected inflation in the US economy. Undoubtedly, that’s the kind of return you would expect from your inflation hedge.

You can invest in commodities through futures contracts, but ETFs are a simpler option. You can find commodity ETFs that specialize in one type of commodity, like oil or agriculture. Or you can invest in a fund with a broader strategy. iShares S&P GSCI Commodity-Indexed Trust (GSG), for example, offers exposure to energy, industrial and precious metals, agriculture and livestock.

6. Gold

Gold is a type of commodity, but it deserves an explanation of its own. Many investors tout gold as a solid inflation hedge. Unfortunately, his performance in this regard has been inconsistent. Gold did very well in the late 1970s as inflation shot into double digits. But in other periods of inflation, gold has depreciated. This includes the months between March and November 2022, when inflation averaged more than 8%.

Still, gold is attractive as an alternative asset. In economically very uncertain times, it tends to appreciate. You might see it as a hedge against economic disaster rather than a pure inflation gamble.

You can buy physical gold, but it’s easier and safer to hold a gold ETF. SPDR Gold Trust (GLD) is a popular choice backed with real gold.

How different asset classes perform in high CPI environments

Knowing in general how different asset classes react to rising prices can improve your decision making. Read on for the highlights.

Shares: High inflation increases costs for businesses and, depending on the product, can reduce demand. This can reduce margins and earnings. Elevated inflation rates are also affecting investor sentiment. Generally, when investors are nervous, stock prices fall, with or without a drop in earnings, unless negative sentiment becomes extreme, which tends to precede stock market gains.

Steady income: Rising interest rates are pushing down bond prices. Longer maturities are more affected than shorter maturities, which can adjust more quickly to market conditions.

property: As mentioned earlier, property values ​​and rents tend to rise with inflation. This relationship is more direct with physical property than with securities backed by real estate. Securities, including ETFs and REITs, are additionally influenced by investor sentiment and other financial market factors.

raw materials: Commodities are one of the more consistent and effective inflation hedges. If higher commodity prices are not the primary cause of higher inflation, they will be a consequence.

Cash: Inflation lowers the purchasing power of cash. However, the cash news isn’t all bad. When inflation rises, the Federal Reserve responds by raising interest rates. These higher rates feed into returns on cash deposits. So, yes, the money in your wallet is buying less. But the money in your bank will yield more — especially if you keep that money in a high-yield savings account.

Think long-term and prepare for the short-term

Here’s the bottom line: Stocks perform poorly during periods of extreme appreciation, but stocks outperform inflation over the long term. As tough as the stock market seems to be at the moment, it’s smart to stick with it. It’s counterproductive not to do it.

Luckily, exposure to other asset classes like real estate, TIPS, and commodities can offset your overall volatility during these tough times. Add these to your portfolio in small amounts — and then wait for the next bull market. It’s the easiest way to restore your nest egg and get back to growth.

Five Top Dividend Stocks to Beat Inflation

Many investors may not be aware that dividends have provided 40% of total stock market returns since 1930. And what’s even less known is that its outsize impact is even greater in inflationary years, an impressive 54% of shareholder gains. If you want to add quality dividend stocks to hedge against inflation, The Forbes investment team has identified 5 companies with strong fundamentals that will continue to grow as prices rise. Download the report here.

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