The era of very lowinflation seems to be coming to an end. Food
prices started to perk up in 2010, oil prices are on the rise now
and, before long, a wide range of companies may need to push up
their prices to account for their own rising costs.
This can end in one of two ways: with higher -- but still
, or it could trigger a vicious cycle of rising inflation
expectations that create even greater inflationary pressures. It's
not just about food, oil and other raw materials, either. There's a
also a macro-economic concern: if the United States starts to
struggle to find buyers for its debt, it will need to offer far
yields, the dollar would come under pressure and imports into the
U.S. would be subject to major inflation pressures.
Right now, this doomsday scenario is no sure thing. And it would
take several years of pressure to really put inflation on the boil.
But you need to start thinking about it now, gradually adjusting
your investment exposure as any inflationary signs begin to emerge.
My colleague Tom Hutchinson
on three investment classes that will help
against inflation. I would add these three types of investments to
further "inflation proof" your portfolio.
1. Multinational exporters
For a host of reasons, a fallingcurrency boosts inflationary
pressures, and inflationary pressures tend to weaken a
. And once this perilous dance begins, it's hard to stop. That's
why you need to own multi-national blue chips such as
McDonald's Corp. (NYSE:
Procter & Gamble (NYSE:
. Their exposure to calmer foreign economies will help smooth out
their results, while they'll also see a boost in foreign-earned
profits as they are repatriated back into a weaker dollar. [I also
like the three exporters
in my recent article.
2. Stable foreign blue chips
Certain countries have developed very strong economic foundations
that have attracted global investors in search of low inflation
risks. Countries such as Switzerland, Japan and Norway can easily
withstand the impact of risingcommodity costs, thanks to a high
degree of energy efficiency and very sound government finances.
More than likely, these countries' stock markets will stand up
better in an era of rising global inflation, as their own economies
remain relatively unperturbed. You can go with their blue chips
such as Switzerland-based
. You can also look to own a basket of these countries' currencies
by buying a broad-based currency
exchange-traded fund (
such as the
CurrencyShares Euro Trust (NYSE:
PowerShares DB G10 Currency Harvest (NYSE:
Few people think of
when they think of inflation. But they should. Of course, home
prices are subject to a range of economic forces in the near-term,
but in the long-term, they are simply a function of purchasing
power. If inflation builds over time and workers secure
higherearnings to keep up with inflation, their relative purchasing
strength moves up in tandem.
As an example, my parents bought a home in the early 1970s for
$33,000. 10 years later, they sold it for roughly $230,000. It's
not that they were particularly savvy about real estate. Instead,
they simply benefited from the fact that inflation was at high
levels throughout that period.
To be sure, interest rates would rise in an inflationary
environment, so housing prices might take a hit in the near-term as
the cost of amortgage might rise higher as well. Yet, over the
long-haul, inflation would again be tamed and then eventual drop in
rates would help you to catch up on any lost years of
. Falling rates in the 1980s and 1990s made
rates much more attractive, which sharply expanded the purchasing
power for many homeowners.
Now is a great time to be thinking about a real estate purchase,
despite the sobering headlines. Interest rates remain relatively
low and home prices in many regions are well off of their highs. If
you buy a $200,000 home now and take out a $150,000 mortgage,
you'll be very pleased later on if inflation kicks in. As home
prices keep up with inflation, that home might be worth $400,000 in
10 or 15 years, yet you'd still only be making payments on a
Action to Take -->
This is a good time to start keeping an eye on government price
reports. In the middle of every month, you can get a snapshot of
both producer and consumer price trends. The next readings come on
March 16 and March 17, respectively.
Note that many economists also discuss inflation trends excluding
food and energy pieces, which can be volatile. Yet, that may not
make sense any more. These two categories look to be on a new,
higher plane, and their impact is not fleeting. For example, oil
prices may well fall back below $100 a barrel, but they are very
unlikely to re-visit the sub-$70 levels seen a year ago. And a
rising global middle class has put real strains on food prices,
which are unlikely to abate any time soon.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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