How to beat inflation with blue chip stocks—and more

how to beat inflation

Have you wondered how to beat inflation? Here are a couple of ways investors can do it

Here’s a look at how to use stocks to beat inflation through a focus on resource and blue chip shares.

How to beat inflation: Understanding the major causes of inflation

The major source of inflation is today’s fiat money system. That’s where Governments around the world can create new money whenever it suits them. They can do that directly, by printing banknotes. Or they can do it indirectly, by allowing central banks to expand their credit by writing cheques on bank accounts whose only asset is the government’s borrowing capacity.

Whenever a government creates new money, it increases the potential for inflation in its home currency. When the U.S. does it, it increases the potential for worldwide inflation, since the U.S. dollar serves as the main reserve currency of central banks around the world. However, the new money will have little effect until it goes to work in the economy. We need faster economic growth than we now have to turn that inflationary potential into rising prices.

On the other hand, the main anti-inflationary, or deflationary, influence is rising productivity. That comes out of expanding world trade and improving technology. China’s low-priced exports helped to hold back inflation in the past few decades. But Chinese exports may have less of a deflationary influence in the next few decades, due to rising Chinese wages. However, world trade is likely to keep expanding and technology is likely to keep improving. That will have far more influence on world inflation than wage trends in China.

Resource stocks, though volatile, tend to rise with inflation

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The resource sector is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits at resource companies. When the economy slumps, resource prices fall, and this drags down resource profits and stock prices.

In addition to rising and falling with the business cycle, however, resource stocks have a history of rising along with long-term inflationary trends. This gives them a rare ability: they provide a hedge against inflation.

Back in the inflationary 1970s and 1980s, investors used to see this hedge-against-inflation ability as the main reason for buying resource stocks. Now they rarely think of it. That’s because inflation has been waning for three decades.

Inflation peaked at a yearly rate around 13% in the early 1980s. It fell by two-thirds from that level by the middle of the decade. It has gone through a series of peaks and valleys, but has been working its way downward ever since.

How to beat inflation with resource stocks and blue chips

In times of low inflation, it’s particularly a bad time to give up on resource stocks. This highly cyclical sector goes through many booms and busts. You may feel resource stocks could languish for years. You may think it’s best to stay out of them until inflation moves up. But these stocks could give us an early warning of coming inflation. They may shoot up long before inflation revives.

Additionally, we advise investors to look for blue chip companies that are likely to pay off if business and the stock market are good, but that won’t hurt them too much during those inevitable periods when business or the markets are bad.

If you follow our three-pronged approach—diversifying across most if not all of the five main economic sectors, stick mainly to well-established companies, and companies outside the media limelight—then you can be almost certain of long-term gains in excess of what you’d get with any other investment approach.

In a deep or long-lasting market setback, your blue chip stocks will tend to go down, along with everybody else’s. But we think they will go down less and recover sooner. Meanwhile, you will collect steady dividends.

Do you think the Bank of Canada will raise interest rates at its next meeting?


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