Here's How Inflation Might Impact Your PortfolioWhile inflationary fears continue to run high, both domestically and overseas, an opportunity abounds for investors – through both traditional and alternative options.

The annual inflation rate in the U.S. accelerated to a more than 40-year high of 9.1% in June 2022, experiencing the fastest increase in prices sinceNovember 1981. While the inflation rate slowed to 8.3% in August, we will likely see continuedupward pressureon most prices for some time to come.

Yet, despite the current environment of dropping stock prices and skyrocketing inflation numbers, some assets are well-positioned to benefit. Farmland, for example, tends to perform well in inflationary environments, enjoying jumps in bothland valuationsand commodity prices. Historically, farmland returns have had a roughly70% correlationwith the CPI. Let's explore the factors driving prices upwards and how these trends have historically impacted some of the top asset classes.

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Factors driving inflation

As a result of heavily stimulating the economy during the Covid-19 pandemic, the M2 money supply increased byover 40%从2020年3月到2022年6月,M1money supplygrew 5x. This influx of money into the economy helped drive prices to a 40-year high; commodities like food now cost10.4% morethan one year ago.

Shipment delays resulting from lockdowns, worker shortages and slow port turnaround times are causing ongoing supply constraints worldwide. In turn, consumers are facing higher prices due to pass-through costs and input scarcity. Though they have begun to decline, fertilizer prices, for example,increased 80%in 2021; earlier this year, prices jumped an additional 30%.

The Russia/Ukraine war is compounding inflationary pressure, particularly on global food prices. Russia and Ukraine are major suppliers of commodities, particularly staples like wheat and corn; combined, the two countries exportroughly 25%of the world's grain. Due to sanctions against Russia and transportationchallengeswithin Ukraine, only a fraction of this supply has been accessible to the rest of the world. As a result, wheat prices jumped 37% during the first two months of 2022, while corn pricesrose by 21%.

While every period of inflation is different, the historical performance of some of the top asset classes can indicate how each may act in today's environment. Let's take a look at how inflation might impact some of these top asset classes below:

股票

In general, real returns of stock prices tend to declinewhen inflation rises. In fact, from 1979 to 2021, public equity returns have been substantially lower when inflation isover 4.1%. This performance is driven by higher prices for inputs, causing many companies to experience lower profit margins. In addition, stricter monetary policy discourages borrowing due to higher costs.

However, some stock market sectors tend to benefit in times of inflation. Soaring oil and other commodity prices, for example, have led energy sector stocks to generate record profits in 2022; the Energy Select Sector SPDR Fund (XLE) is up42%this year.

Bonds

Stricter monetary policy in response to inflation has historically negatively impacted fixed-income securities. When the Fed increases interest rates, as we're seeing today, bond prices tend to drop as yields become more attractive. As a result, the correlation between stocks and bondsbecomes strongest在长时间的高通胀,这意味着好ds can also lose their diversification characteristics. This can amplify volatility, particularly for investors that rely on a "60/40" portfolio.

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Real estate

Historically,inflation and housing pricestend to move in the same direction, making real estate a popular hedge against inflation. Inflation also can benefit investors who earn income from rental properties, as higher home prices often equate to higher rent. However, higher interest rates often cause investors to demandhigher cap rates, which can negatively impact commercial real estate valuations. In addition, commercial real estate may be locked into long-term agreements that can't be adjusted for inflation or rate changes.

Cryptocurrency

While the track record fordigital currencyisn't long, it was recently found that cryptocurrency does not seem to be as strong of an inflation hedge as was originally predicted. From mid-April to mid-July, cryptocurrency was found to have a95% negative correlationto 10-year U.S. inflation-indexed bonds. Not only does cryptocurrency move opposite of inflation, but it has also recently failed to preserve asset value, with Bitcoin's recent peak drawdown reaching a loss ofalmost 72%.

Farmland

The long-term appreciation of farmland is driven by two major trends: growing food demand and land scarcity. Quality farmland is becoming increasingly scarce worldwide; the United States lost1.3 millionacres in 2021 alone. At the same time, the global population is expected to hiteight billionpeople later this year while topping more than nine billion by 2050. To meet the expected global demand, farmers will need todouble the amount of foodover the next 50 years — all while using less land.

In addition to price appreciation, farmland investors can also benefit from the annual cash yield generated by farming operations. Therefore, when commodity prices increase, farmland returns should increase, too. As a result, farmland has been historically well-situated to protect asset value and generate income, particularly during times of inflation. In a 50-year study of farmland returns (1970 to 2019), annual farmland returns were more than 2.5 times higher than the average yearlyCPI rate.

Related:Inflation Is a Different Beast for Entrepreneurs. Here's How to Protect Yourself.

Despite falling prices in August 2022, many predict inflation will hover around 8% through the rest of the year. Whileinflationary fearscontinue to run high, both domestically and overseas, an opportunity also abounds for investors — through both traditional and alternative options.