Inflation is a phase in economy of a sustained rise in the prices of goods and services. This results in decline in the purchasing power of money, which means that with the same amount of money, you are no longer able to buy the same tangible goods as earlier. There can be different factors responsible for inflation, depending on the type of economy.
For example, in a growing economy, the rise in cost of raw materials can result in a rise in price of manufactured goods. However, in general, the price of commodities is directly proportional to demand and inversely proportional to supply. The more the demand for the product in the market, the higher its price.
The rise in prices due to increased demand, can be countered with adequate supply of the product to the market. Thus, to control inflation and maintain a stable economy, it is essential to ensure that supply never falls short of demand.
Best Investments During Inflation
Inflation leads to devaluation of money which means less purchasing power. So, investments at the time of inflation should be about the proper use of dollars. The trick is to look for the highest gaining sectors and invest your money in them. The energy sector is an example of such a sector. Let us have a look at some good investments during inflation.
1. Gold and Precious Metals
When the market is going through inflation, investing in gold seems the safest bet because investing in gold can never go wrong, and the gold you buy acts as an asset that can come to your rescue in any unforeseen crisis. Investing in other precious metals such as palladium and silver, investing in stocks of gold mining firms, are also safe investments.
2. Crude Oil
Similar to investing in gold, investing in crude oil is also considered one of the safest investments during inflationary times. If you want to invest in crude oil or petroleum, you can do it through one of the investment vehicles such as USO, OIL and DBO.
3. Offshore Investments
If domestic market is facing inflation, it is wise to invest in markets abroad. You can choose to invest in shares and equities, or in currencies of countries having rapid growth and industrialization. Investing in emerging markets, as Brazil, will ensure safety of your money. Till you get returns, the economy of your country would recover from inflation.
Investing in technology is considered safe because irrespective of the market trends, this is one field that will experience consistent growth. The demand for advancements in technology is ever on the rise. Thus, you stand no risk of losing your money, investing in technology.
5. Real Estate
If you want to invest in properties and real estate, you can do so through real estate investment trust (REIT). Investing through these can get higher returns as it is a long-term investment, and time period of investment would supersede the inflationary period. One of the good investments for 2012, the real estate market is currently witnessing a boom.
Investing in stocks during inflation can be profitable, if you invest wisely. Invest in stocks of firms that manufacture products people are bound to buy. Pharmaceutical companies are a good example. Another idea is to invest in stocks of firms that can boast of a cash-rich balance sheet. You can choose from mutual funds to invest in blue-chip stocks.
7. Treasury Inflation Protected Securities (TIPS)
Rate of rise of inflation is indicated by consumer price index (CPI) and Treasury inflation-protected securities are related to CPI. The major benefit of investing in these is, they fetch you a compensating return on the rate of inflation. Managed by government of the United States, these are one of the best investments during inflationary times.
In addition to these investment options, you can also invest in inflation-indexed bonds, mutual funds and direct stock investments. Hope these ideas help you in taking a wise investment decision. Irrespective of where you choose to invest your dollars, you should invest at the right time if you want your money to grow. Here's wishing you luck!