There are two types of inflation-demand push inflation and supply push inflation. Demand push inflation occurs when the aggregate demand of products and services is more than the aggregate supply which causes prices to increase. Supply push inflation occurs when the money in the system has increased by way of lower interest rates, rising wages, etc causes the input prices such as raw material, labour, etc to increase which in turn increases the prices of final products and services.

In today’s scenario, we are in a supply push inflation which occurred due to lower interest rates, higher liquidity in the system which caused the prices of inputs to increase. The borrowing rates in the US was as low as 3.25% a few months back against 4.75% currently and almost a fifth of US dollars was printed in the last year, so these are the strongest reasons for increasing buying power and money circulated in the system which caused a supply push inflation, since US is the leader all the other economies follow the US and are affected.

Now let’s see how the asset classes work in higher inflation times:

1) In case of bank deposit, they won’t be able to beat the inflation rate and more or less the investor will not generate a return more than inflation, so currently the inflation rate in US is 3.2% whereas the current deposit rate for 5 years is a meagre 0.25%

2) In case of fixed income mutual funds, the best fixed income mutual funds are promising a return of not more than 4-5% in India for the medium term.
The one principal which should be kept in mind is that fixed income asset class is comparatively less risky than investing in equity markets, that’s why returns generated from equity markets are higher as compared to fixed income. However, that’s why while we are investing in equity asset class we should be mindful and ensure that we take sufficient measures to reduce our risks as much as possible and get risk adjusted return higher than other asset classes.

In equity investing, focus on companies which have performed and given returns over and above the inflation rate. Such as, if the inflation is 8% and company gives a compounded return of 20%, it means the company has the ability to generate 12% return over and above inflation rate of 8%. Such companies are the ones who have consistently increased their earnings over and above the inflation rate.

Equities are one of the few asset classes which has the potential of beating inflation and helps you generate a healthy “real return” over and above the inflation rate.

Now coming to how long is this going to last:

Consumer Price Inflation (CPI) index is a basket of goods and services which are essential to the consumers of that country and measures the incremental changes in prices of these underlying goods and services. It has given weights to different segments of such goods and services based on the consumption patterns of the citizens of that country. In India the CPI index weights are as follows:

Segment Weight

Food & beverages 46%
Pan, tobacco 3%
Clothing & footwear 7%
Housing 10%
Fuel and light 7%
Miscellaneous 27%

Now to give you some perspective, all the commodities which form part of the above segments had reached their all-time highs in terms of price and now have started cooling off, which means that there are signs of inflation cooling down, see below chart

When inflation will come back under control is anybody’s guess, but we can see that it is headed in the direction of cooling down.

Also, to beat inflation, equity is one of the best asset classes and find an optimum risk adjusted return to protect your savings