How to benefit from inflation

You may think, whether we need to protect against inflation or if it’s possible to make profit from it. Inflation affects different spheres of life. Let’s go through them all and find out how to survive inflation.

Inflation, what kind of beast is that?

Prices are like kids, they grow day by day. But unlike kids, prices never stop growing. For example, two months ago you bought your favourite chocolate and paid £2 but today because of inflation it already costs £2.2. So, inflation is a sustained increase in prices across all economic sectors.

Is inflation good?

Everything has bright and dark sides. Inflation isn’t an exception. Depending on whether it is low, moderate or high (also known as hyperinflation) those sides may differ. But hyperinflation is out of norm, so let’s see how things are going with low and moderate inflation.

Cons:

  1. Decrease of the real profit;
  2. Increase in consumer prices, therefore decrease in purchasing power that could be bad for business;
  3. Devaluation of money savings, which reduces the welfare of the majority.

Pros:

  1. With an increase in price values, strong and stable enterprises remain on the market, that is the country’s economy is “recovering”, the advantage of domestic producers is growing;
  2. Prices’ increase stimulates the working-age population to work harder, and as a result to create better products in every field of life.
  3. When people expect prices to rise, they start spending more, which is wonderful for business.

What happens to real estate during inflation?

Owners of real estate face less risks in comparison to owners of stocks and bonds because it’s highly unlikely that real estate value will drop to zero. But there’s also a catch. When we face hyperinflation, people can’t pay their rents, some move to other countries to find jobs, CEOs have to fire their employees and don’t need big offices. For those who invest in real estate, hyperinflation means hard times. But the news isn’t all bad as nothing lasts forever. 

Do commodities do well during inflation?

First of all, what is a commodity? In simple words it’s a common object of consumption or a good. For example, oil, paper, natural gas, metals. But not every product is a commodity. Wheat is a commodity, cereals that you eat for breakfast are not.

Commodity prices depend primarily on global supply and demand, and it always means risks as goods come and go. Imagine you lived in the past and invested in firewood for people to heat their homes, and then hello-hello somebody invented an electric heater. And what would you do? Of course this happens when we’re speaking about long-term investment but still stay alert. Always.

One more thing to consider is when you buy commodities, you shouldn’t forget that you also buy yield equal to inflation minus transaction costs, “black swans”, volatility costs, tax. In other words you invest in the yield, which is worse than inflation. 

Is inflation bad for bonds?

Speaking of investing in bonds during inflation, here’s the situation. If bonds’ interest is higher than that of inflation,  you can buy bonds. If it’s lower, it’s time to think. Imagine you saved £1000. Inflation is 5%, so now you have £950. But if you invested your £1000 in bonds with interest rate of 2%, then in a year you’ll have £1020. Yield from bonds – inflation = £970. Still better than without bonds. Of course, as always there’re risks, so it’s better to use a diversified approach. 

Inflation and stock market

If not taking in consideration hyperinflation where the situation is more complicated, here’s what you should know.

Firstly, when inflation is rising, a lot of people start buying stocks to save the value of their money. Demand increases together with supply. Business is happy.

Secondly, with inflation prices rise. Income and cash flow become higher, stocks go up.

And of course it’s possible to make money even during hyperinflation, because there will always be companies whose stocks will reach record peaks. We don’t need to go any further for examples, remember the pandemic times. Meal-delivery services gained and continue to gain a lot of money, Netflix stocks went up, and there’s much more. So, inflation trades are more than possible if you know what to invest in. By the way, check our education section in the app, it will help you to invest more wisely.

If you’re not sure what stocks to invest in, especially for you, we’ve created collections, so you are able to invest in ideas, not in random assets.

Does debt increase inflation?

Here everything depends on whether we sell or buy. If you get a loan from the bank, then inflation is your best friend. Let’s say you borrowed £1000 and you have to pay £20 every month. Inflation has risen, and now your £20 has less value. So, it reduces your debt in the medium and long term.

On the contrary, if you lend money, there’s no winning for you with inflation, as you will give more than you get. 

So, what now?

Now you know what happens when inflation is coming to town. For some people that means problems, for others – profit. What to do when inflation is high is up to you. Open an ISA with Orca or transfer your ISA for free and start your fight with inflation together with us!


Orca does not provide investment advice. If  a customer has any doubts,  they need to contact an investment adviser. Terms and conditions apply. Your Capital is at Risk.

Orca is an appointed representative of RiskSave Technologies Ltd, which is authorised and regulated by the Financial Conduct Authority (FRN 775330).

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