How to profit from inflation

How to profit from inflation

From groceries to gasoline to automobiles, inflation has hammered Americans’ purchasing power. In fact, the best-known measure of inflation hit its highest level in four decades. A myriad of factors have come together to increase inflation in 2021 and 2022. To stay financially healthy, we must aim to not only invest so that our money keeps pace with inflation, but also so that we profit during this one. We discuss several investments you can make to build your wealth during times of high inflation. Consider working with a financial advisor when looking to adjust your investments for inflation.

Understanding Inflation

Inflation generally refers to price increases across the economy as a whole, although it may refer to price increases in just one or two economic sectors. Inflation can be caused by many factors such as spikes in demand for goods and services or rising costs of production. It is often measured by the 12-month Consumer Price Index (CPI), which is based on a defined basket of goods and services. In February 2022, the CPI soared to 7.9%, a four-decade high.

Several factors weaken the value of the dollar. One is Russia’s invasion of Ukraine and the associated fears that the attack could turn into a war between NATO and Russia. Another factor is the volume of money the US central bank has pumped into the economy during the pandemic. In other words, there is an abnormally high amount of money chasing goods and services in the economy. Finally, it is generally expected that inflation will not rise rapidly. This expectation tends to feed on itself and drive prices up.

How Inflation Affects Your Money

Inflation has five major effects on your money.

Prices on the rise. In the immediate term, inflation makes it more expensive to buy goods and services. The inflation rate reflects the evolution of prices over the past year. So for individuals, that means it costs more to pay for milk, jeans, and an accountant’s time. This is especially a problem for people, like retirees, living on a fixed income.

Income goes up (often). One of the most famous relationships in economics is the so-called Phillips curve. It models the relationship between employment (or wages) and inflation. Generally speaking, as unemployment falls, inflation tends to rise. As unemployment rises, inflation tends to fall. In February 2022, unemployment was at the very low level of 3.8%.

Expenses often increase. The Federal Reserve targets a core inflation rate of around 2% per year. They could aim for zero inflation every year, but they don’t. Instead, the Federal Reserve treats some inflation in the economy as a good thing. This is because most economists agree that is generally the case. Inflation causes people to move money around the economy. People are more likely to spend and invest their money if they know it will lose value as it sits idle in safe deposit boxes and unproductive cash accounts.

The debt burden is easing. Inflation causes debts to tend to lose value over time. In 1999, the median American income was $20,102. Twenty years later, in 2019, the median American earned $34,248. This means that the same amount of work and effort that generated just over twenty thousand dollars in 1999 earned someone over thirty-four thousand dollars in 2019. Now suppose you contracted $10,000 in fixed-rate student loans at the end of the Clinton era. The amount you owe would stay the same, but the value of those dollars would steadily erode. The amount of time and work you would need to generate $10,000 would decrease year by year, as inflation made every dollar worth a little less.

Investments that can profit during inflation

How to profit from inflation

How to profit from inflation

There are a number of ways to not only protect your money from inflation, but also to emerge from a period of inflation with greater real wealth. Investing in tangible assets is widely considered a hedge against inflation.

Gold and precious metals

Over the years, gold has been the traditional investment to hedge against inflation. Gold is a physical asset and tends to retain its value while the value of financial assets may decline due to declining purchasing power. Gold is not a perfect hedge against inflation, but its price tends to rise with inflation, allowing you to maintain your purchasing power. In August 2018, gold sold for $1,077 per ounce; by March 2022, it had climbed to over $2,000 an ounce.

Various products

Cheaper tangible assets that do well during inflation include many types of commodities. Agricultural products such as wheat, corn, soybeans, livestock and timber are some of these products. Industrial metals like nickel, copper, and steel also tend to do well during inflation. The same goes for natural gas and crude oil, which rose from under $20 per 42-gallon barrel in April 2020 to over $100 in March 2022.


Another tangible asset to consider is real estate, which tends to rise in an inflationary economy. We all have to live somewhere and whether it’s apartments, single family homes, or some other type of structure, real estate values ​​will rise and keep pace with inflation. One of the ways investors can invest in real estate is by renting out a rental property, which generates an income stream. Another is with a Real Estate Investment Trust (REIT). This allows you to take an equity stake in a business that owns and operates income-generating properties.

Treasury Inflation Protected Securities (TIPS)

TIPS are government-issued bonds that help protect you from inflation since their principal increases when inflation rises. TIPS also pay interest twice a year at a fixed interest rate. The value of interest payments also rises and falls with inflation. Coupon payments and principal amounts of TIPS are adjusted daily according to the change in the CPI. The best case scenario is to buy TIPS before inflation materializes. Then you can take full advantage of increases in principal and interest as inflation rises. If you buy TIPS too late in the inflationary cycle, your portfolio will already have been negatively impacted by inflation. TIPS are particularly attractive investments for retirees trying to preserve their capital.


How to profit from inflation

How to profit from inflation

Series I bonds, purchased from the US Treasury, are indexed to inflation like TIPS. There are two components to I-Bond returns. One is a fixed interest rate and the other is a component of your total return linked to inflation and, more specifically, the CPI. The I-Bond interest rate is adjusted for inflation every six months. Interest on I-Bonds accrues tax-deferred, but when you redeem them, you pay tax on the interest at your ordinary tax rate.

Value investing

Value investing involves identifying and buying stocks whose intrinsic value, as assessed by fundamental analysis, is lower than their market value. Central banks normally respond to inflation by raising interest rates. Historically, value stocks are less sensitive to interest rate increases than growth stocks.


Inflation decreases the value of your money. Although it can ease the burden of debt, it often harms consumers and investors. However, there are several types of investments that tend to hold up well – and even gain – during inflation. Some of them are tangible assets, like real estate and commodities. Other securities with similar benefits are government issued bonds calibrated to rise with inflation.

Tips for investing

  • A financial advisor can help you respond to inflation in a way that fits your goals, time frame and risk profile. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • If you want to be able to determine the rate of inflation yourself, use SmartAsset’s Inflation Calculator.

  • Find out approximately how much an investment will be worth in the future. Use SmartAsset’s investment calculator to determine its future value.

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