How to protect your income and invest if inflation surges

The post-pandemic global economic recovery is characterised by a sharp increase in inflationary expectations

The US, European and UK economies are recording a sharp increase in inflationary trends. Getty
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Will Rogers, an American comedian and newspaper columnist who died in a plane crash in 1935, once famously said: “Invest in inflation. It is the only thing going up.”

While Rogers was referring to the Great Depression, the spectre of rising inflation is back to haunt global economies. The post-pandemic global economic recovery is characterised by a sharp increase in inflationary expectations. From growing supply chain disruptions, increasing commodity prices to dirt-cheap monetary policies, the reasons for the current rise in inflation are numerous.

The US, European and UK economies are witnessing a sharp pick-up in inflationary trends. As the world’s largest economy, inflation in the US is seeping into the global consumption and manufacturing cycle, while the ongoing spike in wholesale price indices in China and India is adding to the inflationary trend.

Here are my tips on inflation-proofing your spending and income, as well as how to invest if inflation surges. However, it is important to note that all investments carry risk.

Stay invested in equities for the long term

The total return provided by the S&P 500 over the past 10 years has been 238 per cent, with an annualised equivalent rate of 12 per cent. This highlights the power of long-term equity investments.

While short-term corrections and selling waves affect the immediate returns on equity investments, the long-term growth opportunities can provide value to the average investor.

Diversify your portfolio with gold

A look at the total return analysis of the SPDR Gold Shares exchange-traded fund that primarily invests in physical gold shows a stellar performance since it was listed in 2004. The total return of the GLD ETF since inception has been 275 per cent, or an annual equivalent rate of 8.29 per cent.

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Diversification is key and gold, along with equities, can provide better investment opportunities during periods of high inflation
Vijay Valecha, Century Financial

Over the same period, the compound US inflation rate has been 42.5 per cent. During times of high interest rates, gold can show a tendency to correct on account of its inverse correlation with the dollar and bond yields. Its relative allure as a safe haven and a major input to jewellery and other luxury ornaments has been proved.

Diversification is important and gold, along with equities, can provide better investment opportunities during periods of high inflation.

Property

Property usually stands the test of time against long-term inflation and protects your standard of living.

However, investing in property can be confusing, time-consuming and cumbersome. With this in mind, retail investors could consider diversifying their property portfolios by investing through crowdfunding opportunities.

DUBAI, UNITED ARAB EMIRATES , April 05 – 2020 :- One of the shopper with protective face mask after doing shopping at the Carrefour supermarket in Ibn Battuta mall in Dubai. UAE government told residents to wear facemask and gloves all the times outside the home. (Pawan Singh / The National) For News/Online/Instagram.

Buy in bulk to save on groceries

Buying food and groceries in bulk instead of an ad hoc basis always saves money over the long term. For instance, many supermarket offers are aimed at consumers buying combo packs. This is especially true for perishable goods.

Manufacturers often use combo-offer discounting as a marketing gimmick. However, this is beneficial for the consumer, too.

Prepay mortgage instalments

A period of high inflation is often followed by an increase in core banking interest rates. What often follows is a rise in the applicable equated monthly instalment component of an existing home loan.

As a rule of thumb, the borrower is better off paying off at least 30 per cent to 40 per cent of their total home loan value through a one-time, early payment option. This should be especially used in an environment with low mortgage rates.

Lock in rent contracts for longer

A dip in property prices can often give more negotiating power to tenants and property buyers. This is especially beneficial for tenants who are looking to stay in their current home for longer periods.

For luxury property, the landlord may often look to offer some leeway for existing tenants. During times of distress, the landlord will always look to secure his cash flow in the immediate and medium terms and, hence, offer some benefits.

Build an emergency fund

Building an emergency fund and consistently setting aside some money from your monthly income is one of the most critical things to consider. This will come in handy on a rainy day. Allocation to the emergency fund should be in line with the expected increase in the rate of inflation.

Bottom line

Protecting yourself against inflation has become the need of the hour. Today’s age of complex world dynamics demands sound and consistent investment and saving techniques.

Vijay Valecha is chief investment officer with Century Financial in Dubai.

Updated: July 07, 2021, 4:30 AM
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