3 Ways You Can Profit From Inflation

Image by: Paolo Camera
By Michael Sterling

During inflation, most investors run around with their money in their pocket unsure of what to do with it. But you’re smarter than that. You don’t need to be paranoid about losing your money in the wrong industry, instead, all you have to do is simply look at the rules of each industry in relation to the market. It’s easier said than you may think.

There are obviously certain industries that will be better off than others in an inflationary environment. If you truly want to succeed during this kind of atmosphere, it’s crucial to side with companies whose stock prices and dividend appreciation will grow ahead of the rate of inflation. This is when investors will truly get their gains. Ask yourself these questions:

  • Does the company depend on the U.S. dollar?  
  • Does the company have a history of regular dividend increases ahead of the inflation rate?
  • Can the company quickly pass through their cost increases to the market?
  • Does the company follow the likes of their competitors?

One of the most important things to understand is that the government cannot continue to print money as it is without high inflation resulting.

In the coming years it’s nearly impossible not to see the first wave of a giant inflation coming and, when it does, billions of dollars will flow out of the stock market as interest rates begin to rise. As an investor, it’s your job to know which industries your money should be going in that will be able to counteract this drastic outflow. Here are some things to look at.

#1) Choose Industries That Rely On YOU

It’s important to look at where companies get their profits. Let’s compare oil companies and airlines, just as an example. While both industries are considered commodities, they perform differently when their costs are rising.

For oil companies all it takes is one company to raise its prices, and the competition follows. Airlines used to do the same thing when they were regulated, but now that they’re unregulated certain airlines have significant cost advantages.

Southwest Airlines (LUV) is a good case. A few years ago, they made a huge bet on where fuel prices were going and got it right. Because of this, they had a great advantage over their competitors. Plus their Rapid Rewards has become the best in the industry.

Unlike drivers who might spend more money burning fuel than driving a few miles to a cheaper gas station, air travelers can price evaluate on the internet and compare airfares much easier. Whenever cost increases in the airline industry, those who maintain a cost advantage over their competition use it as an opportunity to increase their load. By filling up two to four more empty seats on a flight, that income is pure profit.

The main principle of every company is to remain profitable. So, for years airlines have been cutting costs in an effort to stay afloat. It’s these kinds of companies we all should look for. No matter where the dollar is at, the dependency relies on the price of a ticket – and in that area, they bow down to the consumer.

#2) Buy Precious Metals

Let’s pretend that tomorrow the world discovers the U.S. dollar is worthless. Traditional investments such as gold and silver will soar as it’s considered worldly income – nothing’s changed in the last few thousand years. Own them. Be patient. Hide them in your attic if you have to, but never be afraid to keep them. They will always be worth more in the future.

*Tip: to read more about gold, click here.

#3) Beware Of “Cost Plus” Companies

There are a lot of businesses who set their selling price on cost plus, which is a method of pricing goods below cost with hopes of building enough volume in sales to bring their unit cost down so they can become profitable. Sometimes it works, but most of the time it doesn’t. During inflation, these will be the first companies to go under.

Amazon (AMZN), for example, used price as its main competitive advantage for years, delivering very low profits for nearly a decade as it grew. In every industry, there can really only be one strong price leader that consumers go to because of its low price. Obviously Amazon grew to become incredibly successful, but this is risky business during inflation when the dollar will be a different language.

One thing to look at is companies who choose to grow through innovation rather than price lowering. Companies like Apple (AAPL) is a prime example, and will only grow higher and higher in the coming years.

By choosing to continually upgrade the quality of its products, they keep the competition in constant catch-up. As a result, they’re a low-cost producer because they already have the bigger share of the market.