The basics of inflation
Inflation is a measure of price increases within an economy. When inflation increases, it means a currency’s power declines, and can no longer buy the same amount of goods – this is known as a reduction in purchasing power. Inflation is calculated by assessing the increase in price of a basket of goods and services in an economy over a period of time.
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Is inflation good for the economy?
Inflation can be good for the economy depending on the rate of change and the perspective you hold. For example, slow inflation can have a generally positive effect on the economy, coinciding with the economic growth driver of low interest rates. In high inflationary circumstances, inflation usually creates larger profits for businesses selling goods, better investment returns and higher rates of employment.
However, inflation does come with the increase in the cost of living. So, for those who are unemployed, or in lower pay brackets, inflation reduces their ability to enjoy a high quality of living and buy less unessential goods. Governments will also have to spend more money in order to complete projects due to the higher cost of goods and services; this likely comes in the form of increased taxes.
What is an inflation trade?
An inflation trade is a strategy that aims to take advantage of the rising prices caused by inflation. This can involve altering a portfolio’s makeup or using derivative products to hedge existing positions.
Why trade or invest during inflation?
Trading or investing during in can be a great way to hedge against the impact on your existing positions or find new ways to profit in stable markets. However, it’s important to do your research and ensure your positions are balanced, otherwise you might just be opening yourself up to increased risk in a notoriously difficult-to-predict environment.
What to trade in inflation?
Here are some types of stocks to trade during inflation to protect your portfolio. But it is important to remember that prices aren’t predictable, and past performance is no guarantee of future results.
Consumer staples stocks
The consumer staples sector is made up of all the companies that make and sell essential products, including food, beverages, healthcare and hygiene products. They are also known as discretionary or defensive stocks. As individuals need to buy these products regardless of the state of the economy, the companies are able to bring in profits regardless of whether inflation is high or low.
Examples include Procter and Gamble, Coca-Cola, FedEx and McDonald’s.
Learn more about defensive stocks
Real estate-linked stocks
Real estate stocks are traditionally a great asset to turn to in most economic environments, but they tend to perform well when there’s higher inflation, as the sector posts higher gains due to the increase in housing prices and higher rent costs.
Generally, investors use real estate investment trusts (REITs) as a means of gaining exposure to the housing market without having to buy property themselves. REITS make money during inflationary periods by increasing rents and passing that income on to shareholders. Even hotel and leisure REITs can boost their prices to turn a greater income.
Examples of popular REITs include the Secure Income REIT and Apartment income REIT.
Discover more about REITs and how to trade them
Oil is a key asset to trade during inflation, as the two have such a close relationship. Oil powers the global economy, as it’s used to heat homes, power vehicles, make plastic and other goods, and produce electricity. So, when economic conditions are strong enough that inflation rises, the demand for oil rises.
You can trade oil directly, using futures, spot contracts or options, or you can trade the shares of oil-producing companies like Exxon-Mobile, BP, Chevron, Royal Dutch Shell or TotalEnergies.
Discover how to start oil trading
Gold is another commodity that’s typically traded in inflationary environments, but for a completely different reason. When prices are high, and traditional currencies have less and less purchasing power, gold become a more attractive store of value for investors. The supply of gold is finite, which means central bank decisions cannot impact its value, which further backs its reputation as a safe haven.
As with oil, you can trade gold commodity markets via futures, spot contracts and options, or you can focus on the shares of gold mining companies. Gold miners will benefit from higher prices as it makes their portfolios worth more. These include companies like Barrick Gold, BHP Group and Rio Tinto.
How to trade inflation
- Open an account, or log in if you’re already a customer
- Search for the asset you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
Alternatively, you can practise trading stocks in a risk-free environment with a City Index demo account.