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  1. #1
    AngelaKim9 Guest

    Default Rising inflation rate, what to invest

    Hi guys
    Lets say if the inflation rate is rising, that means consumer prices rise as well, do i get it right? If yes, does it make sense to invest in consumer sector just because of rising inflation rate?

  2. #2
    anna marrie kex Guest

    Default

    No it does not make sense to invest in consumer sector. High inflation leads to unstable changes in inflation that can hinder overall economic growth. You would want to hedge against domestic inflation with commodities like gold or oil, TIPS- which go up with inflation, or foreign markets.

  3. #3
    anitakh11 Guest

    Default

    Thanks for the advice, will look into it

  4. #4
    AnnakAW Guest

    Default

    While your question is brief the answer is much more complex. Inflation is the bane of many an asset managers' existence because inflation deteriorates the 'real value' of many assets and reduces the purchasing power of most, if not all, cash flows.

    The best example of this and probably the most common and well known is that of bonds. Bonds are often referred to as "fixed income" due to the fact their coupon payments, the interest, is known in advance. For example, with a hypothetical 5% 10 year bond that pays semi annually you know that you will receive $25 every six months per every $1,000 in face value of the bond that you own until the date the bond matures and your principal is returned. But what happens if in 5 years inflation has reduced the purchasing power of the dollar so much so that $25 five years from now is only buys what $15 buys today? It doesn't take a genius to see that you as a bond holder have been screwed in this arrangement.

    This is a very simple example that purposely ignores the effect of anticipated inflation whereby an investor will demand higher compensation in the form of a higher yield on the bond if he or she perceives that inflation will be unacceptably high over the life of the bond. In sum, one of the many 'premiums' that are demanded by bond investors (which include a liquidity premium, a default risk premium, a credit downgrade risk premium and more) is an inflation premium. A rational investor will demand sufficient interest so that the real yield (nominal yield minus inflation) on the bond will compensate for expected inflation over the investment horizon.

 

 

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