5 Ways To Profit During Inflation in 2022

Successfully investing during inflationary times can be challenging because your investment returns need to outpace the rate of inflation. 

This goal can become difficult to achieve as the dollar loses purchasing power and companies struggle to deliver profits to shareholders.

Thankfully, it’s still possible to build wealth from several inflation-friendly assets. We’ve found some of the top ways to profit during inflation.

What is Inflation?

Inflation is when the prices for goods and services rise. For example, Dollar Tree stores now charge $1.25 per item instead of $1. 

There are several reasons why inflation happens, including:

• Increases in production costs
• Labor costs increase
• Money supply increases
• Interest rate hikes
• Item shortages (also known as scarcity)

Essentially, when costs increase or items become more scarce, inflation occurs.

Types of Inflation

In order to better understand inflation, it’s important to be aware that there are three different types.

The three main types of inflation include:

• Built-in inflation: Prices rise due to higher wages and cost of living
• Cost-push inflation: Production costs increases cause selling price increases
• Demand-pull inflation: Prices increase for an item due to consumer demand

Of these three types of inflation, demand-pull inflation is reportedly the most common category.

How Does Inflation Impact Assets?

It’s possible to profit during any economic situation, including inflation. However, it can be more difficult to make money from investment opportunities when inflation is high.

Ultimately, how inflation impacts investments depends on the asset itself.

Assets Inflation Hurts

Due to economic uncertainty, inflation can hurt the following assets.

Consumer Discretionary Stocks

As prices rise for necessities like groceries, utilities and gas, people have less money to spend on designer clothing, high-end electronics and lavish vacations. This can reduce profits for companies that offer these types of goods and services.

Growth Stocks

Growth-focused companies tend to have small profit margins and high debt balances. If consumer spending decreases, they have less money to remain profitable and keep the growth momentum going. 

Investment-Grade Bonds and CDs

Most fixed income portfolios hold conservative bonds and bank CDs with stable yields. This helps avoid volatility and preserves wealth. Unfortunately, the inflation-adjusted investment returns can still be negative.

Assets That Benefit From Inflation

While there are several downsides to difficult economic times, inflation can also have investment advantages.

Tangible Assets

The market value for tangible assets like real estate and commodities can increase if demand remains healthy. You can profit if you own an asset that other people are willing to buy at a higher price.

Non-Dollar Assets

Investors can convert their depreciating dollars into “inflation hedges” like gold bullion. This can have less downside risk.

Value Investments

Value stocks have a relatively lower share price appreciation potential than growth stocks in bullish conditions. However, these companies can outperform the market as they are more likely to be profitable and pay dividends.

High-Yield Savings Accounts

Banks may increase savings account rates and bank CD yields as interest rates rise. If so, your deposits can earn more interest. 

How to Profit During Inflation

These investment ideas can be the most profitable during times of rising inflation. Consider several of these options, listed in alphabetical order, to diversify your portfolio.

1. Commodities

Inflation reduces consumer spending but doesn’t halt purchases altogether. Factories will still produce items, and stores will continue selling food and merchandise. 

As a result, producers will need natural resources to make the items that consumers and businesses need.

However, commodities are inherently volatile. Plus, they have a cyclical price history that can turn from profit to loss quickly. 

Some of the raw materials you can get exposure to include:

• Agriculture: Crops, fertilizer and farmland
• Energy: Crude oil, uranium, natural gas and renewable energy
• Industrial metals: Aluminum, copper, iron and steel
• Precious metals: Gold, silver, platinum and palladium

The easiest and least risky way to get exposure to this asset class is through commodity funds. You can make money from rising spot prices. 

However, you’ll want to be sure to sell before deflation sets in and commodity prices drop.

It’s important to note that most commodity investments receive a Schedule K-1 tax form instead of the more common 1099 form. You may need to wait until the end of the tax filing season to file your return as these returns arrive later.

Additionally, the only way to earn dividends from commodities is by investing in commodity-producing companies or royalty stocks. 

If you’re new to commodity investing, you might want to consider the All Weather Portfolio. This strategy recommends a 7.5% asset allocation.

2. Inflation-Indexed Bonds

Certain government bonds automatically increase their yields as inflation rates rise. Therefore, these bonds become more appealing when inflation rates increase as they can have significantly higher yields than investment-grade bonds. 

Typically, most bond yields rise as investors sell their existing notes, which reduces the trading value. With traditional bonds, long-term investors might earn more interest income. However, they can lose money if the bond value decreases too much.

There are two inflation-linked bonds available through the U.S. Treasury. I Bonds (Series I Savings Bonds) are the first type. 

I Bonds offer the following:

• A minimum one-year holding period
• Fully mature after 30 years
• Interest rate adjusts every six months
• Can buy up to $10,000 in notes per year
• $25 investment minimum

Treasury Inflation-Protected Securities (TIPS) are the second type of inflation-linked bond.

TIPS offer the following:

• An investment term of five, 10 or 30 years
• Can sell them early on the secondary market after holding for 45 days
• Purchase them directly from the United States Treasury 
• $100 investment minimum

The redemption policies differ in terms of the minimum holding period and early redemption penalties for each bond. Thankfully, you can easily redeem your notes early if you find a better investment opportunity or deflation reduces your future income potential.

It’s even possible to purchase a TIPS Bond ETF through most investing apps to get automatic exposure to different maturity dates and yields. There is also no minimum holding period like when you buy TIPS through TreasuryDirect.

You may appreciate these inflation-friendly bonds since they can be less volatile than stocks and commodities while earning competitive returns. 

3. Loans/Debt Obligations

Peer-to-peer investing can help you earn monthly income as borrowers repay personal loans. As lenders increase interest rates for loans, your interest payments can increase as well.

Unfortunately, higher loan APRs increase the minimum monthly payment for borrowers who may already be struggling to pay the bills. Since these loans are unsecured, you can lose your remaining investment if the borrower defaults.

If you prefer a more diversified approach to debt investing, consider:

• Collateralized debt obligations (CDOs)
• Mortgage-backed securities (MBS)

Your online brokerage may offer ETFs or mutual funds for each debt type.

These funds are the easiest way to get exposure to multiple collateral-backed assets with a single investment. 

In addition, you will earn dividend income. Plus, you can potentially sell your shares for a profit if they appreciate long-term.

The investment yields from investing in these debt instruments can be higher than U.S. Treasury bonds and corporate bonds. However, these yields can be lower than inflation-indexed bonds, so it’s worth comparing rates before investing.

Additionally, early borrower payoffs reduce your income potential.

4. Real Estate

There are several different ways to invest in real estate and make a profit. The most common way is to own rental property. With this strategy, you will primarily earn recurring income from tenant rent payments. 

A second way to make money through real estate is by selling property for a profit. Inflation can potentially increase market value as the asset prices for tangible assets in short supply tend to go up in this economic environment.

Some of the income-producing real estate options include:

• Real estate investment trusts (REITs)
• Crowdfunded real estate (i.e., Fundrise)
• Single-family rental homes
• Short-term rentals (i.e., Airbnb)
• House flipping 

Investing through crowdfunded real estate platforms can be the most hands-off option, and your annual dividend returns can be from 4% to 9%. This may outpace inflation. 

5. Stocks 

Inflation makes it more challenging to beat the stock market, but there are still winning stocks that you can invest in. 

The primary reason why the stock market is harder to invest in during inflationary times is that rising costs mean consumers are making fewer discretionary purchases. As a result, businesses can struggle to pass profits onto shareholders. 

Some of the investment sectors that perform well in spite of inflation include:

• Commodity producers (i.e., agricultural, gold and metals)
• Energy (i.e., oil and gas companies)
• Financial stocks (i.e., banks)
• Insurance
• Utilities

The best-performing stocks tend to be in the “value stocks” category. These companies are generally well-established industry leaders that don’t have the explosive growth potential of newer businesses with a smaller market cap. 

Despite being a boring investment, value stocks typically trade at cheaper valuations, indicating less downside risk. Well-run companies can earn a steady income and may also provide items that consumers need in any market.

You might prefer dividend stocks since you have the assurance of a recurring dividend payment, even during a bear market. But, the average dividend yield for blue-chip stocks is between 2% to 3%. This won’t outpace today’s inflation rates.

When a stock dividend doesn’t beat inflation, you must also rely on rising share prices to make up the performance difference. 

Of these investment ideas, stocks can also have the most liquidity and lowest investment minimums. You can buy and sell on-demand if you only want to hold stocks for a short time to profit from rising share prices.

Pros and Cons of Investing During Inflation

It’s vital to invest and earn passive income regardless of market conditions. Some of these investments can help you make money when inflation slows down or if we enter a deflationary environment.

On the other hand, certain investments will likely decline when inflation isn’t a threat. 

Furthermore, sector rotation is common, which is why it’s essential to be adequately diversified. 

Being ready to sell inflation-focused assets that you only plan on holding for a short time will also help you earn profits and not lose your investment gains.

However, if inflation becomes too high, you may decide to chase investments that are too aggressive for your risk tolerance. 

These investments can quickly produce negative returns if an adverse event happens. This means you can lose more than if you stick with your normal strategy.

Before you invest during inflation, take these pros and cons into consideration.

Pros

• Profit from rising prices
• Some investments are inflation-indexed
• Physical assets can outperform

Cons

• Negative investor sentiment is more likely
• May require becoming too aggressive
• “Safe” investments have negative real returns

FAQs

These questions can help fine-tune your inflation investment strategy.

Summary

High inflation has several negative consequences on your monthly budget and the overall economy. Fortunately, it’s still possible to invest and make money as the dollar weakens.

Allocating some of your portfolio for inflation-friendly investments can help you achieve your financial goals and give you more cash to offset your increased living expenses.