The Inflation Protection Quandary

A succinct article by Weamein Yee in Banks.com (Friday), on what to do in inflationary times:

It’s almost like everyone is holding their breath to see what happens next.

As we know, Marc Faber recently suggested we might wish to stand on the platform rather than board any of the asset trains.

Stocks will tend to fall in anticipation of higher interest rates to combat rising inflation. The price of long term bonds will fall as investors will demand higher yields in an inflationary environment.

Yee says that the investor may be forced to consider choices that would normally be regarded as rather risky or sophisticated: commodities, precious metals and shares in foreign (less inflation-prone) countries. This is the paradox: taking a risk may be the best form of playing safe.

But before that, perhaps we could increase our holdings of government-backed inflation-linked savings bonds, something Yee doesn't mention. A lot depends on how the government defines inflation for the purpose of calculating our returns, but it should be fairly reasonable, one would hope.

The writer points out a final irony: low interest rates and high inflation support real estate prices.