Where to Invest When Inflation is High (and What to Avoid)

Investing inflation

Like it or not, the U.S. is likely to see some inflation over the next several years. This is to be expected given the low interest rate environment we’ve been living in for over a decade, but that doesn’t mean there aren’t changes on the way.

By the numbers: According to the BBC, consumer prices in the U.S. rose 4.2% during the 12 months ending in April. That’s the biggest spike in pricing since September 2008, right in the middle of the financial crisis. Higher prices for cars and food drove much of the increase.

The Biden administration just last week unvealed a proposed $6 trillion budget to rebuild America’s infrastructure as well as the social safety net, but much of that spending would come at the expenses of potential inflation.

What does these mean for your portfolio? The “I” word can be scary, but the data isn’t exactly terrible. Historically, stocks have tended to do well during periods of inflation. In fact, the average annual return on stocks between 1990 and 2017 was 11%. Even when you factor in the cost of inflation, the average annual return was 8%.

According to Business Insider, the best areas to invest in a high inflation environment are stocks, commodities, real estate, alternative investments, and U.S. Treasury Inflation-Protected Securities (TIPS).

Takeaway: Pay attention to inflation. It’s a leading economic indicator and it matters to the overall health of the U.S. economy. But don’t expect it to crater (or supercharge) your investment portfolio. There’s a lot more that matters to Wall Street than that.


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