Inflation is a normal aspect of a growing economy. But when it gets too high for comfort, it can start to clash with your everyday budgeting decisions. Inflation in the U.S.
Inflation doesn't just make trips to the store more expensive. It can complicate your investing decisions as well. While investing during inflation could open you to some risk, embracing certain assets and strategies could keep you on even footing.
What causes inflation?
This happens when an economy has too much money chasing after too few goods. In economics, this is described as the law of supply and demand. When consumer demand for goods and services is abnormally high, inflation typically rises at a faster pace than the
Inflation also can stem from an unusually low supply of goods and services, assuming the demand remains constant. When inflation rose to a 40-year high in 2022, supply-chain disruptions reduced the availability of goods, while consumer demand stayed high, unemployment was low and households generally had more cash to spend. This trend continued into 2023, as inflation ebbed but remained stubbornly above historical averages.
Should you invest during inflation instead of just saving?
When faced with a climate of financial uncertainty, it can feel like the safest strategy is simply to save your money. But investing during inflation still has a place on the table.
Since inflation erodes your purchasing power, investing your money could help to prevent this by producing returns that match or exceed the average rate of inflation. That is the general goal of investing during inflation: to outpace the average rate of inflation over the long term. One
Where to invest during high inflation
Considering the goal to outpace inflation over time, these types of investments could be worth exploring when prices are high:
Stocks
Inflation-protected bonds
Real estate
Gold
During times of uncertainty and rising prices, investors have historically used
Consumer staples
These are stocks of companies that sell items, such as health and food products, that people need even during times of economic difficulty. These investments are positioned to do better than stocks of companies selling non-essential products or services during inflationary periods. However, there's no guarantee they'll generate positive returns.
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Inflation hedges
Inflation doesn't have to equal a total spending freeze. You can employ certain strategies to hedge against inflation in your savings and investing decisions.
Strategies for investing during high inflation
As is always the case, investing involves risk. There are no guarantees—and investing during periods of inflation is no different. But with the right approach, you could help your finances outpace inflation over time.
Consider these strategies for protecting and growing your assets when inflation is eroding at purchasing power:
Diversify your investments
Leverage your employer match
If your employer offers a
Consider the dollar-cost averaging strategy
When you make periodic purchases with a set dollar amount, such as monthly 401(k) or other retirement contributions, you buy more shares of investments when prices are low and fewer shares when prices are high. Over time, this can average out and reduce market risk compared with investing a singular lump sum amount. This is called
Explore bond laddering or CD laddering
Review your portfolio
Periodically check that you have the right mix of investments to grow your money over time while minimizing short-term risk. You occasionally may need to
Tailor your financial goals with inflation-conscious solutions
Investing during high inflation means pinpointing the strategies that work for you and your family. As you begin implementing an investment strategy for inflation, consider reviewing your budget and working with a local