Rising Inflation and Interest Rates? Why and Possible Ideas!
Inflation is generally bad for an economy because it reduces the value of your cash. Most individuals are experiencing some level of stress over inflation and higher rates. Let’s explain why and review several ideas.
Over an extended period in can be extremely painful. When prices rise, people can buy fewer goods and services with the same amount of money. This can lead to a decline in purchasing power, lower standards of living, and increased uncertainty and instability in the economy. How often do you get a raise a year? If the cost of eggs was 1.41 in April 2021, it was 4.823 in January 2023. Gas has gone from 2.42 in Jan 2021, now it is 3.71 in April 2023. This doesn’t seem like much in simple dollar terms, but it is about 171% and 26% increase respectfully in about 2 years. Even if you look at gas which is not up as much as earlier because of lack of travel due to a slowing economy, you probably didn’t get a 26% raise at work. Now multiple by all the things you have. This is very painful for retirees and those on a fixed income. The cost of everything was going up by 6.4% annually in January. This is why the FED is raising rates.
Raising interest rates is commonly used by central banks (FED) to combat inflation. When interest rates are increased, borrowing becomes more expensive, which should slow down the economy and reduce demand for goods and services. Higher rates can help to curb inflation by reducing the money circulating in the economy.
Higher interest rates can also attract foreign investment, which can strengthen a country’s currency and help to stabilize inflation. However, raising interest rates can also have negative effects, such as increasing the cost of borrowing for consumers and businesses, and slowing down economic growth. Layoffs happen as businesses have a slowdown in their products and services and it is expensive to fund needed temporary working capital. Therefore, central banks often carefully weigh the benefits and drawbacks of raising interest rates before making any decisions.
However, a Fiscal Investor is a long-term investor. You need discipline and education. There are stocks that might do better because of their products and services. During an inflationary period, some stocks and companies may perform better than others. Generally, companies that can pass on price increases to their customers and those that offer products and services that are in high demand tend to perform better during inflationary periods.
Here are a few types of stocks and companies that could be good investments during inflation:
Consumer staple companies: Consumer staple stocks are companies that offer products that are essential, such as food, household goods, and personal care products. These companies tend to be resilient during inflationary periods because people will continue to buy these products regardless of price increases.
Dividend stocks: They can be a good investment during inflationary periods, depending on the company’s ability to maintain or increase its dividend payments over time. Dividend-paying companies tend to be more established and stable, with a history of generating consistent earnings and cash flows. This can make them more resilient during periods of inflation, as they may have the ability to pass on higher costs to their customers or adjust their pricing to maintain profitability.
Energy companies: During inflationary periods, the prices of commodities such as oil and gas tend to rise, which can benefit energy companies. However, it’s important to note that energy stocks can be volatile and subject to fluctuations in supply and demand. People will stop travelling, take vacations, and watch their energy bills.
Infrastructure companies: Inflationary periods can lead to increased government spending on infrastructure projects, such as highways, bridges, and public transportation systems. Companies that provide construction services or materials could benefit from this increased spending. Wasn’t there an Infrastructure Bill passed recently? These projects take years to start and complete.
Gold and other precious metals: Commodities are often seen as a hedge against inflation because their value tends to rise during periods of high inflation. Gold has been an underperformer for a long time. Crypto seems extremely risky and volatile. Do your homework and be educated! This is something we stress on every investment. You must do your own research and make sure it is appropriate for you.
It’s important to note that investing always involves risks, and past performance does not guarantee future results. Before investing in any stocks or companies, it’s important to do your research and consult with a financial advisor to determine if the investment is appropriate for your individual financial situation and goals.