Be Your Own Fed: An Investment Strategy to Beat Inflation

There’s no question about it. Inflation is here, and it’s at a three-decade high. Supply chain issues and labor shortages have both driven down the availability of goods. In addition, the pandemic stimulus packages infused so much money into the economy so quickly that they have lowered the dollar’s buying power. Because of these factors, we’ve been seeing prices going up, and in some cases skyrocketing, in almost every sector of the economy. Food, electronics and gas have all experienced price increases. Everything involving microchips is more expensive now, including video games, medical equipment and cars. Even Christmas trees, real and artificial, are seeing a price jump.

Inflation, at its core, is defined as an overall increase in prices and a corresponding fall in the purchasing buying power of money. The Consumer Price Index (CPI) is the most widely used measure of inflation. This number is calculated by the Bureau of Labor Statistics based on the prices of 80,000 different goods and services. It includes the prices of food, gas, doctors’ visits and cable TV, among many other items. According to the CPI, the rate of inflation from October 2020 to October 2021 was 6.2 percent. This is a stark jump. In 2020, inflation was only 1.4 percent. Since the great recession, it has generally hovered below 2.5 percent, and in 2015 it was a mere 0.7 percent.

Currently, economists are trying to anticipate when inflation will level off and by how much. Opinions are mixed on this. The Fed anticipates that inflation will drop down to two percent by the middle of 2022. San Francisco Fed President Mary Daly stated that she expects supply-chain constraints to persist into next summer, yet inflation will start to drop. “As we get through the pandemic, we’ll see prices moderate, and we’ll be back to that situation in which we had for more than a decade of forces pushing inflation down, not pushing inflation up.”

Of course, I take the predictions offered by the Fed with a grain of salt. After all, they have an interest in quelling the public’s fears about inflation. If they were to announce that we’re likely to continue to see record high inflation for 2022, it could stimulate stockpiling and trigger even greater inflation. I’m not saying that that’s necessarily what’s motivating the Fed, but some healthy skepticism may be in order.

Other analysts see inflation subsiding in 2022, but not as much as the Fed does. Goldman Sachs recently released a report stating that they expect year-over-year inflation to drop to 3.0 percent by June 2022, and 2.15 percent by December 2022. The Wall Street Journal did its own survey of 67 economists to determine the average inflation they’re predicting for the next few years. They anticipate inflation eventually dropping below three percent in 2022 and staying between two and three percent in 2023 and 2024.

When it comes to real estate, Goldman Sachs is anticipating continued high inflation. Their report states that “Of all the shortages afflicting the US economy, the housing shortage might last the longest . . . [Housing inventory] remains well below pre-pandemic levels and the outlook offers no quick fixes for the shortage.” The high demand and continued shortage of supply means that US homes will climb another 16 percent through 2022, according to Goldman.

They also expect that this will mean increases in the cost of rental housing through 2022. Goldman sees shelter inflation rising to a year-over-year rate of 4.5 percent by the end of 2022, the fastest price growth in 20 years. In many metropolitan areas, rentals have already soared well beyond 4.5 percent.

There are some people, like me, who expect inflation to remain high through 2023. Many of the above projections are based on an expectation that supply chain issues will be substantially improved next year, but production can’t meet demand while there is still a major worker shortage. Job openings nationwide still stand at 10.9 million, which is up from seven million pre-pandemic. Meanwhile, we’re still seeing people quitting their jobs in record numbers.

Be Your Own Fed

So, how can you combat the impact of inflation? I recommend that instead of waiting for the Fed to regulate the role that inflation plays in your net worth, that you take control back. It’s time to be your own Fed. By that, I mean that it’s time to establish an investment strategy that will always keep up with inflation. That way, if there’s high inflation or low inflation, you’ll still see a return on your investment month after month.

As far as investing goes, some of the best assets for hedging against inflation are rental properties. There will always be demand for rental housing, and currently, with a shortfall in the US of approximately 5.2 million homes, there has been a surge of would-be homeowners who are being forced to rent while they wait things out. That, in turn, has led to rents increasing.

This strategy is applicable whether you’re in a position to buy a property outright or if you need to finance it. If you borrow at a fixed rate, your debt will remain the same, but it will be paid off by your tenants, whose rents will rise over the years. All the while, you have an asset that you can either sell for appreciation in the years ahead or leave behind to your heirs.

If buying your own rental property is too hands on, a good way to passively invest in real estate is through Real Estate Investment Trusts (REITs). REITs are companies that own and operate real estate for profit. Different REITs invest in different types of assets, so you’ll need to do your homework first before investing. For example, it’s probably not a great time to invest in an REIT that mostly owns retail or office space. I would recommend investing in REITs that own multifamily housing, as well as data centers and industrial real estate. All three types of real estate will have long-term demand.

Of course, my hope is that the experts are right and that we’ll see inflation drop below three percent in 2022. But whether inflation goes up or down, it’s important to have an investment strategy that can beat it. I’ve built my career around multifamily rental properties, and I know from experience that inflation cannot erode my bottom line.

About The Author

Ken McElroy is the co-partner of MC Companies in Scottsdale, Ariz. He is the author of the best-selling books, The ABC's of Real Estate Investing, The Advanced Guide to Real Estate Investing, and The ABC's of Property Management. McElroy is also a contributor for The Real Book of Real Estate by Robert Kioysaki, and The Midas Touch by Donald Trump and Robert Kiyosaki. McElroy's fourth book, The Sleeping Giant, is dedicated to the new class of entrepreneurs who are emerging in today's economy. For editorial consideration please contact editor@jetsetmag(dot)com.

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