Monetary Inflation: What Is It, and Do I Need to Protect Myself?

In a scramble to keep the economy from plummeting into a depression during the COVID-19 crisis, the US Government signed off an unprecedented $2.3 trillion in relief to support households, employers, financial markets, and state and local governments. And discussions continue on providing a second stimulus package worth an additional $1 trillion.

For the most part, this money is coming essentially out of thin air.

But conventional wisdom has held that governments cannot simply create money on such a massive scale and continue propping up the markets without triggering inflation.

Should investors be worried? To understand whether inflation is likely to become a risk in the near term, let’s take a closer look at what inflation is, what causes it, and how you can protect yourself. 

Inflation: An Overview

In 1990, the average cost of a new home in the U.S. was $79,100, and the average income was $17,710. Only 29 years later, the median price for a new home is $329,750, while the median income is $75,500.

The dramatic difference in prices can be explained in a single word: Inflation. Inflation refers to the rate at which goods and services increase over time. You can also think of it as a drop in the value of a dollar, as inflation means you are able to buy less than what you previously could with the same dollar. 

The most common type of inflation is demand-pull inflation. It occurs when there is a spike in demand for a product or services across an economy, causing a price increase. A second, less common type of inflation is cost-push inflation, which occurs when supply is limited and prices increase, but demand remains the same.

In theory, printing more money could also cause inflation to spike. According to the quantity theory of money, the general price level of products sold is directly related to the money supply in an economy. Were the government to increase the money supply by an excessive amount (say, by $3.3 trillion in total!), it could result in a similarly excessive increase in inflation. And when an increase in money supply sparks frenzied spending, inflation can escalate into hyperinflation.

Is Post-Pandemic Inflation an Immediate Risk? 

Let’s apply this line of thinking to our current situation. If the Federal Reserve creates too much money, it could lead to skyrocketing rates of inflation. However, this has not been the case—for the time being.

With the country still in the grip of COVID-19, Americans are saving at record-high rates and spending less—in part because many stores are closed but also because of high unemployment rates—which is causing a drop in demand. Currently, our biggest threat is not inflation but deflation, or the falling of prices.

But this may not always be the case and frankly, everything is unpredictable right now. Inflation is only likely to become a problem when our economy and labor markets recover. And given the uncertainty around near-term unemployment levels, the consumer spending impact due to Covid, concerns about a second Covid wave, that might not be any time soon. 2025 anyone?

But you can't just wake up one morning and decide to protect yourself from future inflation. You need to plan for it. And you should start today.

How Investors Can Protect Their Assets From Inflation 

In summary, inflation may not be a risk today, but it is likely to be a risk in the not-so-distant future. To safeguard wealth from the threat of inflation, we suggest investors diversify their portfolio with real assets—such as multifamily real estate, farmland, and agricultural investments.

Real estate is a popular choice not only because rising prices increase the resale value of the property over time, but because real estate can also be used to generate rental income. Just as the value of the property rises with inflation, the amount tenants pay in rent can increase over time. These increases let the owner generate income through an investment property and helps them keep pace with the general rise in prices across the economy.

The same is especially true for investing in farmland, and agriculture. Grocery stores, food manufacturers, and other businesses that sell food often thrive during recessions and global crises. Agricultural produce and other foods tend to increase in price when inflation rises, meaning investors can use agricultural investments as a hedge and a wealth preservation tool.

If you are interested in learning more about investing in multifamily real estate and agriculture to protect your portfolio and preserve your hard-earned capital in a post-pandemic economy, we invite you to schedule a chat with us.

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