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Question: I've read thatcould pick up in coming years. What can I do about it?
The Investing Answer: Every few decades, investors start to grow concerned about the runaway effects of inflation. As we've recently seen, gold prices have tumbled as the reality of increased gold production reminds us of the immutable laws of supply and demand. If the world needs more gold, they'll simply mine more.. In response, they reflexively place their into gold, silver and other precious metals. But that's a huge mistake -- gold and these other hard assets are simply "perceived" hedges against
What should you do? Ignore the crowd.
If you really want to hedge against inflation, look to the types of that have a strong inflation-beating track record -- over the long-term.
Let's take a closer look.
1. Building A House Never Gets Cheaper...
Considering housing prices have fallen far from their 2007 peaks, this may seem like an unusual inflation hedge. Yet over the course of decades, housing prices have managed to keep pace with inflation for a few simple reasons.
First, unless you live in places like Texas where there is still so much land to develop, you have likely noticed that most markets have few idealleft to develop. Where I live, in Hudson Valley of New York, development pressures have led many towns to restrict new building sizes to at least three acres. In response, land prices climb ever higher.
More to the point, the cost to build a house never gets cheaper. The raw materials and labor required to build a house always rises. Let me give you an example. My parents bought a home in the early 1970's for around $70,000 and sold it a decade later for $200,000. (A 186% increase!!) That was an era of high inflation, and the cost of almost everything was rising at a fast pace. Indeed, people also received solid income boosts as employers understood the need for pay raises. And higher pay meant higher buying power for consumers, which helped to ever-rising home prices.
Make no mistake, you shouldn't expect your home to appreciate in value much faster than inflation. That was the mistake many people made in the past decade. And any time home prices do rise much faster than inflation for an extended period, a hangover is almost inevitable. Still, with home prices now back in check, the stage looks set for appreciation at least on with inflation.
Robert Shiller, an economist with a keen eye on housing trends, analyzed the historical relationship between housing prices and inflation and found that, "Over the 100 years ending in 1990 -- before the recent housing boom -- real (i.e. adjusted for inflation) home prices rose only 0.2 percent a , on average." Yet he that the Federal Reserve is actually trying to induce a bit of inflation in the economy, and he figures inflation by itself is likely to trigger a 25% in home prices over the next decade. "All else equal, the current Fed policy would have this effect: A home selling for $200,000 today sell for around $250,000 in 2023, though the real price -- corrected for inflation -- would be ," he adds.
2. This Land Buy Paces TheMarket...
Even if you already own a home, buying land as an factors than national factors.can be a great move. It's simply a matter of supply and demand, and in many parts of the country, the supply of truly desirable land is becoming more limited. Hard data about historical land price trends are hard to pin down, and besides, are influenced much more by local
Still, as I noted a few years ago in this column: "According to a study conducted by Kansas State University, the average annual return on U.S. farmland since 1950, including crop and land appreciation, is 11.5% compared to a 12% annualized total return for the stock ." Roughly 60% of that annual came from rising land prices (with the other 40% due to profits earned by farming, which is of little use to landowners).
One of the reasons to consider land right now is historically low borrowing costs. If you mortgage payments won't budge. (Of course, property are likely to rise in tandem with inflation.)50% down and finance the rest at 4%, your land is likely to deliver a solid long-term return when inflation rears its ugly head again, especially since your
3. Inflation Just Can't Keep Up With This Instrument...
corporate profits have recently grown at 6% to 8%, even as the U.S. economy grows just 2%.in fact, actually outpace inflation, in large part because of continual increases in operating efficiency. A Coca-Cola bottling plant can churn out more bottles and cans today than in past decades, just as automakers can now make more cars and trucks with fewer employees. Those efficiency explain why
More broadly, focus on any stocks with the ability to pass on price increases without losing . Electric utilities are a good example, as regulators let them hike their prices in tandem with their own rising costs. Consumer staple stocks such as Johnson & Johnson (NYSE: JNJ) are often seen as great inflation hedges. The Select Sector (NYSE: XLP), which owns stocks such as Procter & Gamble (NYSE: PG), Colgate-Palmolive (NYSE: CL) and others, is also a good way to own companies with .
One final thought: If the U.S. economy starts to grow at a faster pace in coming, look for inflation concerns to renew. After all, a stronger economy starts to bump up against its natural limits, what "capacity utilization," and once we hit those limits, then "bottlenecks" start to appear in the economy, forcing companies to raise prices. These inflation hedges should help you avoid losing too much sleep when inflation starts to percolate.