Get Ready: Inflation Is Coming
Inflation has been rising since the economy started to open up post-pandemic...
Inflation has been rising since the economy started to open up post-pandemic. We’ve been seeing patterns across sectors and industries in the US. The most affected are the energy and food prices. Input prices are also up. (Input are the goods that make the products we consume). Inflation in the US as of June 2021 has been around 3-4%. That is considerably higher than anything we have seen since the pandemic crisis.
So in all of this seemingly terrible news, how can you best prepare for inflation? Is there anything you can gain from it as an investor?
Simply put, inflation is the rise in the cost of goods and services in an economy over a set period of time. For it to qualify as an inflation event, it has to be sustained for a long period of time rather than a small blip for a couple of months.
When inflation is on the horizon, the Federal Reserve tends to raise the federal funds rate. This means that interest rates will increase overall, which increases borrowing costs and restricts access to capital. Generally speaking, when interest rates rise unexpectedly, stocks and bonds fall in value and volatility rises.
Volatility is typically the enemy of investing. However, there is a way to literally make volatility an asset by investing in options. One way to analogize options is buying and selling insurance. When markets go haywire, as they can in periods of unexpectedly high inflation, insurance becomes expensive. Selling options in these periods can offer very attractive risk-adjusted returns, just like when insurance companies can make a handsome profit by raising premiums on customers.