Inflation is on the rise, with consumer prices increasing by 3% over the past 12 months, surpassing the Federal Reserve’s 2% target. However, despite this increase, there is a silver lining for investors. With interest rates high and real interest rates reaching 2.4%, savers can now earn a guaranteed return on their investments.
The key to understanding inflation lies in its impact on interest rates. Higher interest rates make payments on new mortgages less affordable, but they also create opportunities for those saving capital. Real interest rates are particularly attractive, as investors can earn high returns without worrying about inflation eroding the value of their savings.
One reason investors are better equipped to combat inflation is that they have a more optimistic view than consumers. A survey by the New York Federal Reserve Bank found that consumers expect inflation to rise to 3%, whereas bond market players estimate it will average 2.2% over the long term.
Despite this, there are valid concerns about the impact of inflation on the economy and individuals. Tariffs, deportation of workers, and a projected federal deficit of $1.9 trillion could all contribute to higher prices. Economists warn that deficits can warp the price level in different ways, either by extracting an “inflation tax” or by creating budget surpluses needed to pay down rising Treasury debt.
As the economy navigates these challenges, investors can take steps to protect themselves from inflation’s rise. Buying TIPS (Treasury Inflation Protected Securities) instead of unprotected Treasuries can provide a safeguard against price spikes and ensure that investors are insulated from future regrets.
Source: https://www.forbes.com/sites/baldwin/2025/02/14/how-investors-can-win-the-inflation-race