With the Federal Reserve’s latest rate hike, the threat of sustained inflation growth in the near term is a real possibility. The Fed has taken a number of measures to tame inflation. Among these is its adoption of a target federal funds rate of 3.75% to 4.00%.
To date, the best way to minimize the impact of inflation on your portfolio is to take a multi-pronged approach. For instance, you could increase your exposure to inflation-hedging assets. In addition, you should allocate some of your portfolios to asset classes that can withstand the spikes associated with an uptick in the rate of inflation.
There is another way to mitigate the inflationary effect: to reduce your exposure to debt. This may involve reducing your portfolio’s holdings of government debt. Buying government debt is usually the path to a good return, but it also means taking on a higher risk. You might believe that the bonds will be paid off by running surpluses, but it’s not necessarily so.
A more comprehensive approach would be to invest in less sensitive assets. For example, you could buy a gold bullion certificate. However, you should not buy this in lieu of buying a bond.
It’s important to keep in mind that the inflationary effect is not limited to interest rates. Higher prices on energy and commodities will also put upward pressure on inflation.
One of the better ways to measure the inflation effect is to check the Consumer Price Index (CPI) for the month. Recent CPI data indicates that the average monthly CPI is around 4.2%.