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How to Profit from Inflation

3 Best Investment Ideas to Make a Profit from Inflation

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Inflation – often called “the silent killer of wealth” is now causing economic havoc around the globe. Several countries are experiencing higher inflation than they did 40 years ago. A rise in inflation can be detrimental to society as basic necessities get more expensive. If you ask the financial sector for advice on how to avoid going bankrupt, they will probably suggest investing. The reason is that, by investing, you can even out your wealth and gain profit from inflation, protecting your purchasing power. 

Inflation poses a serious threat because it makes money saved today less valuable tomorrow.  

Consumers living in inflationary times have weakened purchasing power, and this can even interfere with their ability to prepare for retirement. For instance, if an investor invested in stocks and bonds and earned 5% a year, but inflation was at 3% during this time period, then they would actually only earn 2% from their investments. The purpose of this article is to examine the fundamental factors behind inflation, how it affects asset values, and how to make smart moves to benefit from it. 

What drives Inflation? 

Prices began to rise in 2021, and the very beginning of this growth was considered “transitory” because the economy was reopening, and the base effect was low. For example, the inflation rate in the United States had already risen beyond 5.0% by May 2021, and a 7% increase in the consumer price index happened just before the end of the year.  

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Russia’s invasion of Ukraine in 2022 further punished consumers, triggering (among other things) a rise in crude oil prices that has kept gasoline prices high to this day. This year’s inflation rate hit a 40-year high of 8.5% in March, however, it dipped to only 8.3% in April, and it is likely to remain a problem for many months to come. While the Bank of England (BoE) has predicted an inflation reading of 11% for the consumer price index (CPI) for October, the Federal Reserve (Fed) has increased its inflation projections for 2022 to 5.3%, reports.  

While both banks have increased interest rates to 1.25% and 1.5%-1.75% respectively, policy tightening may not be enough to cool demand at this point in the inflationary cycle. 

How Inflation affects Asset Values? 

Considering inflation is a measure of how quickly goods and services are becoming more expensive, many investors carefully watch how their portfolios perform in terms of inflation. A rise in inflation could significantly affect the value of future returns, so it is essential to take inflation into account when making investment decisions.  

The purchasing power of fixed, long-term cash flows would decline over time as inflation increases, causing some asset classes exposed to those cash flows to underperform. In contrast, assets that have more flexible cash flows may be likely to perform better and provide some protection from inflation, as well. To profit from inflation times, one must do some research and invest wisely in order to take advantage of the opportunity. 

There are different ways in which inflation affects the various asset classes. For example, when the inflation rate is higher, cash and cash equivalent products are the usual victims along with fixed income investments. It has been shown that commodities, tangible assets such as property and infrastructure, as well as some equities may be able to perform well when there is inflation.

The Complex Relationship Between Inflation & Asset Prices

It’s a natural reaction for every investor and economist to be cautious about the future when faced with an uncertain situation.  

Global economic activity is being undermined as COVID-19 spreads across much of the world in March 2020. Fiscal and monetary policies are being used by many governments to offset this loss. With central banks being uniquely extended at present, academics and practitioners debate new measures for stimulating the economy. Since we cannot predict how the situation will play out in the future, a well-constructed portfolio is the best way to guard against future uncertainty and profit from inflation. 

Understanding the relationship between asset prices and inflation is essential for developing a diversified investment strategy. Here is a look at how each of the assets reacts in response to changes in inflation rates. 

1. Impact of Inflation on Foreign Exchange

Inflation is basically a sign that money’s value is declining, making it more difficult to purchase goods. Global central banks adjust monetary policies to prevent high inflation rates, which has always been a concern for many consumers. If a country has consistently low inflation rates, its currency value rises, which increases its purchasing power. In contrast, a country with high inflation will usually see its currency value depreciate and interest rates rise. 

“Interest rates, inflation, and exchange rates are highly correlated.” 

Central banks use interest rates to influence the other two factors which affect the value of their currencies. As interest rates rise, foreign investors invest more, causing exchange rates to rise. Conversely, lower interest rates encourage consumer spending and economic growth. As a result, currency values usually rise and borrowing becomes easier. A decrease in inflation, however, can lead to lower interest rates, which would put downward pressure on the currency. 

So, the main determinant of the value and exchange rate of a currency is what the monetary system wants from it, such as attracting investors or growing the economy. Forex traders need to consider inflation when determining exchange rates and developing their trading strategies since it could reduce their return on investment (ROI). Forex trading is an investment that can be challenging, especially when interest rates and inflation are in play. Make sure you are in touch with the key economic data that influence exchange rates to stay informed of changes and be able to profit from inflation to the fullest. 

2. Impact of Inflation on Stocks & Mutual funds

Equities are certainly going to be a safe haven when it comes to protecting you against rising prices since the earnings of companies should grow at a similar rate to inflation in the near future. Consequently, the share price would more than likely rise along with the general price of consumer and producer goods as a whole. That’s why equities like stocks and mutual funds have become one of the most sought-after asset classes among investors.  

However, it is important to note that not all stocks perform well during inflationary periods. Market capitalization-based firms typically enjoy higher returns than smaller firms because they have a more established market presence and a more diverse revenue stream. Furthermore, certain sectors, such as commodities, often experience higher returns of profit from inflation cycles. Conversely, growth stocks that anticipate most of their cash flows to arrive in the future, such as tech stocks, may underperform during high inflation periods. 

Additionally, the rise in prices for goods and services offered by a listed company can also cause a demand deficit, which can negatively affect the company's sales and revenues. It could result in a drop in the stock price, which would ultimately cause the investor to lose money.  

Stock trading offers significantly higher returns than other investment options over the long run if you manage your fear and trade wisely. AximTrade is rolling out its swap-free stock trading, in a move that allows its clients to easily get into the stock market and invest in the stocks of global companies and tech giants. 

3. Impact of Inflation on Commodities like Gold

There is a direct relationship between the commodities market and inflation where commodities prices rise when inflation increases. Investors have the opportunity to earn higher returns of profit from inflation if they choose to invest in the commodities segment. As a natural hedge against inflation, commodities can protect and increase the value of your investment if inflation rises. 

There are a number of commodities available to the consumer, but gold is thought to be among the most precious. Due to its nature as a safe haven asset, its prices begin an upward spiral when any kind of economic crisis occurs, be it hyperinflation, war, or any other type of crisis. There is also a high degree of sensitivity in gold prices to inflation, and prices of gold tend to increase as soon as there is a sign of inflation beginning to rise. 

As a result, even in times of hyperinflation, gold prices will increase, making it a great asset to diversify your portfolio. You can do so by buying sovereign gold bonds, which are backed by a government guarantee and provide stable returns during hyperinflation. Here are some top Gold Trading tips and strategies that will help you understand the market better. 

4. Impact of Inflation on Bank Cash Savings 

Despite the fact that keeping money in a savings bank account promises you a fixed percentage of return. When inflation occurs, savings accounts with average interest rates are the most vulnerable. A savings account is considered a relatively safe asset class since there is very little risk of financial loss in absolute terms. It will, however, diminish purchasing power if the returns provided do not keep pace with rising prices. 

If you want to avoid this, you can put your money in a Fixed Deposit account. The principle of a fixed deposit can be withdrawn at maturity after locking it for a predetermined period of time. Fixed deposits 

5. Impact of Inflation on Real estate assets

A rising inflation rate makes renting, subletting or buying a home an increasingly expensive endeavor. As a result of high inflation, the banks are likely to increase their interest rates, and as a result, you may have to pay an EMI of a higher amount for the loan that you might have taken to purchase your property. It is also possible for high inflation to lead to a bullish real estate market where you might be able to get a little less than the value of your property if you decide to sell it in the future. 

Fortunately, if you are a landlord and are charging your tenants a higher rent in response to higher inflation, you will be able to earn a higher return on your investment. Historically, REITs and real estate ETFs have beaten inflation benchmarks and delivered returns of over 10% over the long term. As such, REITs or ETFs may be better investments than buying a piece of real estate whose value may decrease in a hyperinflationary environment.


How to protect your savings and profit from inflation?

Profit from Inflation

Inflation can have a major impact on your financial strategy. If you are retired or close to retirement, inflation can erode the value of your savings. This is because the purchasing power of your money will decline as prices increase. In addition, if you have debt, inflation can make it more difficult to repay what you owe. This is because the amount you owe will be worth more in real terms than when you originally took out the loan. 

Although inflation can be scary, like any financial movement, it can also be rewarding! 

During periods of high inflation, we should be doubling down on looking for where to invest because the dumbest place you can keep your money is in cash. Below are the top 3 helpful tips on how you can hedge your hard-earned money against rising inflation and secure assets with the potential to profit from inflation in the long run. 

1. Make a long-term investment to profit from inflation

Utilizing a long-term investment strategy has proven to be one of the most successful methods of success in wealth accumulation. In long-term trading, the time between entry and exit positions can range from a few weeks to a few months, even years. Also, staying invested for the long term is the most important thing because it eliminates the danger of being dragged down by market fluctuations, such as inflation-induced corrections.  

Advantages of Long-term Financial Investment:

Rather than going for short-term trading ideas that are prone to excessive risks, think long-term in order to achieve long-term financial goals, such as retirement, paying off student loans, children’s education, marriage, etc. Below are some additional benefits of long-term investment strategy: 

  • Cost-effective: Since you take fewer trades on larger timeframes, you don’t pay a lot of commissions. Since the spread becomes indifferent for larger targets, you are not affected by it.  
  • Time-effective: If you trade long-term, you don’t have to look at charts for long periods of time, just a few minutes each day and let the market do its thing. Your profits will be better with less work.  
  • Less stress: You will experience a less emotional rollercoaster ride by keeping away from charts. The setups and signals will be more accurate than short-term messy markets.  
  • Quality signals: Longer time frames often produce more reliable key levels and chart patterns. As a result, your performance will improve.  
  • Reduced risk: Trading long-term can offer a more stable income that requires less monitoring. Traders do not need to monitor prices constantly or react to frequent market changes unless required. Trading in volatile markets may be more appropriate for long-term investors.  

In order to succeed at long-term financial investment, you must be prepared and have a deep understanding of analytical concepts. By having a long-term market view, it is possible to assess data from a wider perspective, which helps in assessing data accurately. It is usually based on a blend of price technical analysis and fundamental analysis (economic conditions). Also, long-term scales are very useful for detecting overall price trends, excluding short-term fluctuations that may be misinterpreted and make it easier to profit from inflation since you don’t have to worry about trading it. 

2. Diversify your investment portfolio

To become a successful investor, you should invest your money differently so that it generates profits for you even in times of inflation. Certainly, there’s an endless list of investment options available to those who are interested in Investment Portfolio Diversification. However, if you want to make sure your portfolio is well diversified and you profit from inflation, it’s crucial to include the best income-producing assets in the mix.  

AximTrade stands out as the best broker in terms of its reliability and excellent trading conditions, offering Forex, Stocks, Crypto, Indices, Metals, and Energies, and facilitating in-depth market analysis using various tools accessible through the MT4 platform. Read the AximTrade review to discover why this broker has a lot to offer to profit from inflation. 

Factors to consider when building your investment portfolio: 

Any economist can tell you that forecasting the future direction of inflation is extremely complicated. So, the best way to save your capital against market risks and profit from inflation is to build a portfolio that is tailored to your risk tolerance, portfolio goals, and spending needs. Below are ten useful insights we’ve picked up to help you profit from inflation, regardless of the trade-offs: 

  1. Inflation and asset performance are affected by different factors over time, so the link between them should not be taken for granted. 
  1. Protecting against inflation in the short run is not the same as protecting against inflation over the long run as there is a difference between those two. 
  1. The annual inflation rate has rarely shown long periods of positive movement. 
  1. Inflation-sensitive assets such as gold and commodity futures have performed poorly over the long term but have been positively correlated with inflation. 
  1. Investment-grade bonds and Treasuries are negatively influenced by inflation, particularly when inflation volatility is high. 
  1. Natural resources equities and commodity futures are likely to be less sensitive to inflation changes as the energy landscape changes. 
  1. An inflation spike can cause private investments to become illiquid, so they shouldn’t be relied on as a source of funds. 
  1. Investing in stocks and bonds has been more effective than many think at keeping inflation at bay over the long haul. 
  1. Investing in inflation-linked bonds and REITs can enhance long-term returns on equities and bonds. 
  1. If you hold a diversified portfolio of assets to guard against inflation, you will likely have a better long-term return than if you hold an undiversified portfolio. 

Over the past 50 years of data, asset prices have been sensitive to inflation, but sensitivities have not remained the same. It has been difficult to protect against both short-term changes in inflation and long-term inflation without sacrificing one for the other. Ultimately, asset prices and inflation are complex relationships, but understanding them better can help you make smart decisions as well as maximize your profit from inflation cycles. 

3. Hedge against inflation

Hedging is a risk-mitigation strategy used by traders and investors in the financial markets. Normally, this is done by taking an opposing position in the market to offset losses on the main position. You can think of hedging as an insurance policy that protects you from any adverse movements in your investments by taking out an insurance policy. 

But where does this fit into the inflation discourse? We speak of hedging against inflation when we talk about protecting our capital from inflation’s devaluing effects. For this reason, investors need assets that won’t be adversely affected by rising inflation to hedge against inflation. 

As you might know, the Forex market is the largest and most liquid financial market in the world. And with a diverse range of forex pairs available, the market becomes more volatile and can suffer from adverse conditions like changing interest rates or inflation. If you’re a Forex trader, you’re always thinking about how to protect your investments. Hedging is one way to accomplish this. Forex hedging implies the act of lowering or avoiding trading losses that occur from unforeseen situations within the Forex market. 

Forex traders have created a variety of forex hedging strategies in order to reduce the level of currency risk that is associated with economic data and indicators. Therefore, with the help of hedging, traders attempt to reduce their overall risk by buying additional assets or selling existing ones in order to protect their open positions. Adding hedging to your Forex trading strategy not only reduces the risk of losing profits but can also help you to protect your profits by keeping the trading losses at bay. 


How to trade in inflation-beating assets?

Do you know that you can make a profit even in the falling market? Yes, trading CFDs provides you with the opportunity to do just that! CFD trading should be an essential element in every investor’s portfolio. A contract for difference is a contract between an investor and investment intermediate to exchange the price differences of assets like forex, shares, commodities, and indices. 

In CDF trading, profits and losses are determined by the price difference between the opening and closing prices. If you think the price of an asset will rise, you can open a long (buy) position and profit as the price rises. Conversely, if you think the price will fall, you must open a short (sell) position and profit from the decline. Upon closing the position, we will be able to see both profits and losses associated with the position. 

Here’s how to get started with CFD trading in five simple steps. 

  1. Open a trading account by logging in to the member account on AximTrade, and clicking on the “+ Open Extra Account” button on the top right.  
  1. Choose your preferred account type. You can choose between Standard, Cent, ECN or infinite leverage accounts. You can also choose a demo account if you’re a beginner.  
  1. Choose the asset type you would like to trade and make a profit from inflation. 
  1. Choose ‘buy’ if you want to go long or ‘sell’ if you want to go short. 
  1. Now your account is ready for trading. You can find all your accounts in the “My Accounts” tab. 

The key to success in investing is to have a solid foundation of knowledge. Despite the fact that CFD trading is one of the most effective ways to make money online, it may seem complex and confusing for beginners. In order to establish a rewarding investment and subsequently profit from inflation, learning is the first step to successful trading. An online trading course provided by an established provider is always a good place to start. 

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