How to Invest for Hyperinflation

Fewer and fewer people alive today can recall the double-digit inflation of the 1970s. Regardless of the causes, those who do remember do so with dread. From gasoline to groceries to clothing to many other necessities of life, items were becoming so expensive that sometimes choosing one over another became commonplace. Yet smart investors were able to ride out the inflationary trends.

As prices climb today, financiers again seek to protect the values of their portfolios as the purchasing power of the dollar drops. Determining the best inflation-resisting investment vehicles, and the resources to devote to them, is the challenge now.

What Is Inflation? Hyperinflation?

Inflation represents a diminishing of purchasing power. When inflation is on the rise, the value of a currency drops. Accordingly, the cost to procure goods and services moves up. While this is not always bad, it is worth keeping an eye on.

The Consumer Price Index (CPI) and the Wholesale Price Index (WPI) follow the ebb and flow of prices, thereby helping to know the rate of inflation. The belief among mainstream economists is that inflation occurs when the expansion of the money supply is occurring faster than overall economic growth.

As the word implies, hyperinflation is always bad. This is when the velocity of money supply growth clocks at over ​50 percent​ per month. It is most often associated with war, internal political turmoil or a collapse in the production economy. Under hyperinflation, the availability of consumer goods can become sporadic and the quality of life is noticeably degraded.

By means of comparison, since 2011, the CPI shows a rise in prices of ​two percent​ year over year. This rate is easily absorbed by all but the impoverished, and often comes and goes with little attention. By contrast, a hyperinflationary economy can see price hikes between ​five and 10 percent​ in a single day.

Ways to Make Money in a Hyperinflationary Economy

Investing in stocks for inflation delivers mixed results. Data from pre-Nazi Germany and late 20th-century Brazil suggest that stocks do well during hyperinflation. The theory undergirding the data is that companies do well because they simply pass their input costs onto their customers.

Yet such a phenomenon cannot last long since the consumers will eventually find the product or service in question unaffordable. Worse, dividend yields ultimately begin to lag behind the cost of living. So, investing in stocks for inflation, as a singular strategy for the long term, might disappoint in the end.

Traditional investment hedges against inflation may or may not be successful against hyperinflation. For example, gold is often advocated as the best recourse during periods of inflation. Yet its history is inconsistent in terms of offering substantial returns.

Other commodities, such as agriculture or energy, are likewise looked to for refuge when prices soar. At the same time, these investments behave unpredictably for a variety of reasons, not the least of which are weather and political shifts. Investing in commodity-based exchange traded funds (EFTs) represents a more cautious approach.

Read More:How to Budget for Inflation

Consider Real Estate

One vehicle that meshes well with hyperinflation investment strategies is real estate. Whether investing financial resources in physical real property or into a real estate investment trust (REIT), inflation lowers the loan-to-value ratio on a house, building or piece of raw land. In so doing, it lifts the debt burden on property owners. In addition, since property tends to consistently appreciate in value, rents can be raised without significant fear of long-term vacancy.

So, while diversifying is a sound strategy in good times and bad, hyperinflation favors a tilt toward real estate.