Inflation continues to be a central theme in Australian life. We must all find more dollars to meet the rising cost of living. The people most affected are those with variable rate loans, particularly large mortgages.
Could inflation be a benefit to anyone? Is there any way to profit from it? People struggling to meet basic living costs certainly cannot benefit but longer-term investors do have the opportunity to gain from inflation.
Commercial property investments can benefit. Most leases in office buildings, warehouses and shopping centres say rents will increase with the Consumer Price Index, inflation. The CPI rose seven per cent in the year to the end of March.
So commercial tenants are likely to receive notices of seven per cent rent increases soon. That’s nice if you own the building. The higher rents should also mean a higher value for your property. Non-professional investors can easily access such investments via property funds.
Some people say the high interest rates employed to control inflation will boost borrowing costs and reduce demand for assets like properties and shares, causing prices to fall. That isn’t likely for long. High inflation means asset prices will rise.
These assets are in limited supply. They will increase in value to keep up with inflation. No more land is being created. Residential property construction is slow and cannot keep up with a growing population. Commercial construction takes years from planning to completion.
Shares in strong, proven companies are in limited supply. BHP and Commonwealth Bank are not issuing any more. If you want them you must pay up. Companies paying reliable dividends will see firm demand for their shares, pushing prices up over time.
There is more cash in circulation now due to government spending and stimulus measures in response to the pandemic. Governments spent heavily on election promises over the last year and are now spending more on welfare support.
This extra cash circulating will seek out scarce, good quality assets such as properties in good locations and major company shares.
Interest on bank deposits is now higher but they are still not a good place for long term investment capital. With inflation above five per cent, four per cent interest isn’t enough. Cash is losing its purchasing power, its real value.
Long term investors should look for assets that will grow with inflation. It’s a good time to buy now while people are hesitant due to near-term uncertainties. Don’t wait until all the traffic lights are green before starting a journey. By then it will be too late to find good value.