How to Tame (Or At Least Handle) Inflation in 2022

A dollar today will not buy the same value of goods or services 10 years from now. This we’ve all come to understand over the last half-century. Prices rise over time as cost increases that vendors/merchants incur get passed on to the end customer.

Inflation is a natural occurrence within a market economy – but realizing that doesn’t make it any easier to handle while prices rise at historic levels.

It does help to assess the severity of inflation and what monetary regulators are doing to attempt to remedy it. Last year, as measured by the increase in consumer prices (the Consumer Price Index, or CPI), inflation was 6.9%, the highest for any calendar year since 1981. It has since topped 7% and remains one of the clearest drags on the economy and on any economic recovery.

To tame inflation, the Federal Reserve (Fed) will accelerate tapering of its bond purchase program to remove the pandemic monetary stimulus it created in 2020. Plus, coming into 2022 we basically expected the Fed to raise interest rates about three times this year, starting in the third quarter/summer.

The Federal Reserve’s recent policy statement (plus Chairman Jerome Powell’s post-meeting press conference) made it clear they look ready to start raising short-term interest rates in March, looking for 2% inflation long-term.

“In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0.0%-0.25%,” the Fed said. “With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”

The Fed added that beginning in February it will increase its holdings of Treasury securities at least $20 billion per month and of agency mortgage?backed securities at least $10 billion per month.?

The Fed has its work cut out for it, as this won’t be a six-month, one-year, or likely even a two-year task. The supply of money in the market economy, known in economics as M2, is rampant due to the multiple programs of the Fed combined with the Covid-19 spending of the Federal government.?Putting the inflation genie back in the bottle may take several years –?if it can be done at all.

Meanwhile, a disciplined investor can mitigate risk and maximize returns by investing in asset classes that outperform the market during inflationary climates. Such assets can include gold and commodities; various real estate investments such as property (which tends to increase in value during inflationary times) and real estate investment trusts (REITs), which are more effective than property for liquidity; and real asset opportunities, both equity and debt, such as logistics, warehouses, data centers, infrastructure, and farmland.

Other options can include bank loans and other related types of private credit with floating rate interest terms and Treasury Inflation-Protected Securities (TIPS). Floating rate loans are very interesting hedges: The loan payments will keep pace the more the Fed raises interest rates, maintaining the “true interest” rate return for you as a lender.

On the other side of the coin, being able to borrow money today – at these historic low rates for a longer term – to purchase appreciating assets is another technique for the skilled investor (though definitely not for the faint of heart).

The Fed’s goal is a reduction in inflation while making a cozy, soft landing for the economy without tipping it into a deep recession.?A year from now, we’ll have a much better idea whether it can meet both these goals.

Still, as investors it would be wise to get ahead of the Fed’s train and become strategic in your investments.

Written by Walid L. Petiri

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