Inflation and How To Benefit From It

Blog Post Image
Real Estate

Definition

“An inflation hedge is an investment that is considered to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices either macro-economically or due to inflation. It typically involves investing in an asset that is expected to maintain or increase its value over a specified period of time. Alternatively, the hedge could involve taking a higher position in assets, which may decrease in value less rapidly than the value of the currency.” (https://www.investopedia.com/terms/i/inflation-hedge.asp)
“Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods. Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation’s currency.” (https://www.investopedia.com/terms/i/inflation.asp#causes-of-inflation)

Causes


There are a few reasons prices might inflate. In some cases there is an artificial supply cap on homes and that would lead to higher prices if demand does not diminish. Another reason would be for an increase in cost of production of a product or service, and that would be reflected in the price the consumer pays.


The main reason that comes to mind is an increase in supply of money. When there is more money out in supply to spend and people spend that money, that leads to higher consumer prices.


Money supply can be affected by money printing or buying or selling of bonds and treasuries. Any way that authorities try to devalue the dollar, money will lose its purchasing power.


Purpose


The purpose of hedging against inflation is to protect your purchasing power. During times of inflation real estate prices and rents tend to go up. So having your money in an asset that rises in conjunction with how much the dollar is devalued (not dollar for dollar of course), you can protect the money which you have worked hard for. One of those assets is real estate as seen with this chart below and the other two charts show the decline in consumer purchasing power and rise in consumer price index (consumer inflation):

 

Looking to buy or sell a property? Let's team up and find and execute a plan for you!

Feel free to call or text me at 707-480-9383 or email me at fadi.husary@cbnorcal.com.