Fiscal Spending and Inflation
At present, there is a $1.9 trillion Wuhan Virus relief package being presented to Congress for passage. This would include relief for Americans and other interested parties and would include a third round of stimulus checks $1,400 for those making under a certain salary level and continued unemployment “topper” benefits of $400/week until end of September 2021.
In a letter the Republicans sent to President Biden this Sunday, they wrote, “with your support, we believe that this plan could be approved quickly by Congress with bipartisan support.” They have a $600 billion plan that sends $1,000 checks to individuals and families, capping income qualifications at $50,000 for individuals and $100,000 for a family.
Irrespective of the negotiations to date, the question arises: What happens when you have many dollars chasing the same supply of goods and services in the economy? Prices tend to rise due to the higher demand for the same amount of goods. We have all witnessed the recent surge in single home prices, with many people leaving populated cities and looking for homes and space to distance themselves from others and not finding a great deal of homes in the open market to buy. Price of homes has gone up 9.3% nationally. When this happens to other parts of the economy, we call this inflation.
Inflationary forces can create challenges; as savers see their purchasing power decrease, it can lead to less of a desire to save cash. People living on fixed incomes are especially impacted as they watch their purchasing power decrease. Fortunately, there are ways to protect yourself against inflation. Let’s review:
1. TIPS: (Treasury Inflation-Protected Securities) provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. Interest is paid semiannually at a fixed rate. TIPS can be held until maturity or sold prior to maturity.
2. Precious Metals Funds: Historically, the price of gold, and to a lesser extend silver, tends to increase during inflationary periods, as the purchasing power of the dollar decreases. As it takes more dollars to buy an ounce of gold, the price tends to rise.
3. Commodity Mutual Funds: Broadly speaking, the price of commodities tends to increase during periods of inflation. Think of the corn and wheat that go into a box of cereal–rising prices of the raw materials tend to increase the final price of the finished product. There are various investments that invest in agricultural and energy commodities that can potentially benefit from an increase in underlying commodity prices.
4. Equities: Companies that are in inflationary-sensitive sectors such as industrials and materials can potentially benefit in a higher inflation environment. If a company’s activity is producing a commodity, inflation could potentially contribute to improving the company’s bottom line.
5. Real Estate / REITs: Real Estate Investment Trusts can provide protection against inflation. Real Estate rentals and values tend to increase when prices do. For REITs, the dividends are typically a very attractive benefit. According to Nareit, REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last twenty years.
It is always wise to be proactive and have strategies ready when the possibility of inflation arrives. These assets, among others, can provide diversified methods of protection from eroding purchasing power due to inflation.
If inflation is a concern of yours, please feel free to reach out to me. I would be delighted to discuss a personalized plan tailored to your individual investment objectives and situation.
I hope you stay healthy and safe!
Sincerely,
Craig