Inflation vs Investing

Inflation is the general tendency of rising prices over a predetermined period. Inflation reduces purchasing power, which means that the same good or service costs more to acquire. For investors, the returns on their assets must grow at least as quickly as inflation; otherwise, even though they show gains, their investments are operating at a loss. Here’s a quick take at Inflation vs Investing

What is Inflation?

Inflation is the gradual increase in the average price of goods and services. The Bureau of Labor Statistics calculates the Consumer Price Index based on historical data. The CPI measures the cost of items like gas, food, clothing, and vehicles over time to determine how much the cost of consumer products and services has changed. [7]

In August 2022, Canada's annual inflation rate decreased to 7% from 7.6% in July and fell short of market expectations of 7.3%. [1]

Mild inflation levels can benefit an economy, whereas negative inflation rates can harm economic activity. Nevertheless, more significant inflation levels—beyond 2%—can also have unfavourable impacts.

How Does Inflation Impact Investments?

Inflation is the most detrimental to the price of fixed-rate debt securities because it devalues interest rate payments and principal repayments. Lenders lose after adjusting for inflation if the inflation rate exceeds the interest rate. [2]

Debt with a fixed interest rate for a more extended period is more likely to be affected by inflation than debt with a fixed interest rate for a shorter period. This is because inflation's effect on the value of future payments is proportionally more significant and builds up over time.

The assets that are certain to provide more income or increase value as inflation rises perform best under inflation. For example, a rental property where the rent goes up yearly or a pipeline where the price of energy goes up with inflation. However, as was recently announced by the Provincial Government, there is a 2% cap on residential rent increases.?This is well below the current inflation rate. [5]

Over time, inflation may have a significant effect on your investments. Diversifying your portfolio by introducing it to various investment types.

How can MICs combat inflation?

A safe way to increase your investments is to put money into a MIC like Metropointe Mortgage Investment Corporation. Metropointe secures short-term (1 year) mortgages with real estate.?The short-term nature of the loans allows Metropointe to turn over your invested funds to new mortgages at higher rates.?As the Bank of Canada increases rates, so does Metropointe.??

When you invest in a MIC, you are purchasing an interest in a diverse portfolio of mortgages, which reduces risk significantly. Could you finance a mortgage or a rental property on your own? Yes, but doing so would require a lot more work (both in terms of time and money) and a lot more risk if the borrower defaults. Regardless of the economy, people prefer to make their mortgage payments on time, especially if they live in the same home. MICs, therefore, possess a "natural" buffer.

To combat inflation, there will also be thorough knowledge and insight from industry specialists with a lot of experience in mortgage financing here at Metropointe. Even if interest rates go up, they can still make smart choices that help them diversify and improve their investment portfolios.

For more details regarding Metropointe and MICs, please visit us at https://metmic.com/

References:

[1]https://www.reuters.com/markets/view-canada-annual-inflation-rate-slows-70-august-2022-09-20/

[2]https://www.bankrate.com/investing/winners-and-losers-rising-inflation/

[3] https://www.dentons.com/en/insights/articles/2022/june/14/alternative-lending-overview-of-mortgage-investment-corporations

[4] https://www.baymgmtgroup.com/blog/inflation-impact-real-estate/

[5] https://www.stessa.com/blog/inflation-and-real-estate/

[6] https://seekingalpha.com/article/4388468-i-put-half-of-net-worth-hard-asset-investments

[7] https://www.bls.gov/cpi/