Updated: Jul 24, 2020
Inflation can often cause disruption in the certainty and leads to fall in investment. Inflation dampens consumer confidence, spending and reduces aggregate demand. Not only this it also increases costs and reduces competitiveness, which can lead to falling demand. In order to maintain the working and profit earning of a business, precautions against inflation is a must, and one must think of how can they do it?
Here are some tips of protecting the business from escalating inflation.
➢ One popular method of controlling inflation is through a contractionary monetary policy. The goal of a contractionary policy is to reduce the money supply within an economy by decreasing bond prices and increasing interest rates. So, spending drops, prices drop and inflation slows.
➢ Investing in equities that pay reliable dividends can provide a shield against inflation. Provided that inflation does not increase to a level which prompts an extreme interest rate rise, gently rising prices can often be favorably exploited by companies. Experts say investors should be wary of investing in retail stocks in times of high inflation because they may struggle to pass on price rises to consumers.
➢ Investing in real estate such as agriculture, property and gold have always been a great step amidst inflation. Adrian Lowcock, investment director at Architas, agrees and says “Alternative assets such as infrastructure and commercial property usually offer good inflation protection as the assets have long term contracts with rental income which is linked to inflation and rises as it rises”.
➢ Diversification with Gold, it is always a good idea to diversify the portfolio to reduce the risk. During times of uncertainty, investors tend to flock to the safety of gold. However, avoid buying physical gold (ornaments or bullion) because the making charges eat into the returns and issues such as safety, liquidity and purity. When investing in gold, go for financial assets such as gold ETF or gold sovereign bonds. These allow investors to purchase gold in denominations as low as 1 gram while affording high degree of convenience and safety.
➢ The final way to protect yourself from the rising prices is not on the investment side but more on the expense side. The big danger of inflation isn’t some arbitrary number in the economy, it’s that the money that you have to spend every month increases. Fixing liability to a possible degree can be considered appreciative and can result in certainty in future expenses. Cutting down the expenses can not only result in making a better plan against inflation but it would also help the business/individual in dealing with future dynamic environment.
- VANSHIKA MAHAJAN