For much of 2021, “transitory” was the Federal Reserve’s (Fed) word of choice to describe the more-than-obvious inflationary trends across all sectors of the United States economy.

The Fed’s message turned hawkish in mid-December, when they announced a sped-up tapering of treasuries and mortgage-backed securities, from the initial $15 billion per month decrease announced in November to a tapering of $30 billion per month, effectively ending the program in March 2022. Additionally, the Fed has set the stage for three, quarter-point rate hikes in 2022 followed by another three in 2023.

This change in tune came after months of rising consumer prices. In November 2021, the average U.S. consumer paid 6.1% more for food, 31.4% more for a used car,6.5% more for electricity and 25.1% more for gas utilities than a year prior. Overall, the Consumer Price Index rose 6.8% for the 12 months ending November 2021, the largest 12-month increase in consumer prices since June 1982.

Back in May 2021 at Berkshire Hathaway’s annual shareholder meeting, Warren Buffet rang the fire alarm and noted that Berkshire is noticing “substantial inflation” in its homebuilding businesses, especially in steel and lumber prices. As we enter the new year, rising prices, low supplies and a shortage of labor continue to be a repeating theme across industry sectors.

Following a $5.2 trillion fiscal spending response to the COVID-19 pandemic, along with the continuing Fed policy of $120 billion monthly purchases of treasuries and mortgage-backed securities intended to hold down long-term interest rates in order to boost consumer spending and borrowing, the economy has officially overheated and purchasing power is decreasing. An overheated economy not only causes a rise in prices but also one in wages, potentially triggering a price-wage spiral, with companies passing on increased labor expenses to consumers and workers in turn demanding higher wages.

The Federal Reserve’s Response to Inflation

We entered the second quarter of 2021 with Fed Chair Jerome Powell saying inflationary trends were temporary and due to a burst following the reopening of the economy after an ease in COVID restrictions and skewed comparisons to metrics in April 2020 which were depressed due to the lockdown. The Fed bet on supply chains smoothing out bottlenecks, year-on-year data stabilizing and pent-up demand subsiding, but that did not happen. Throughout the year, inflation continued to run uncomfortably and undeniably high, causing the Fed to speed up its plans for tightening the money supply - the halting of bond purchases and raising of interest rates mentioned earlier.

A continuation of soaring prices and decreasing purchasing power is something that we can almost be certain of in the coming months, leaving many people wondering, “What will happen to my financial situation?”

What Are the Effects of Inflation?

With its inherent higher consumer prices and weaker purchasing power, inflation can seriously affect savings and investments. It is a common adage that a dollar today is worth more than a dollar tomorrow and most retirement savings plans take that into account. However, rapidly rising inflation can severely reduce the purchasing power of those that are near retirement and are planning on a sustained lower inflation rate.

What Can Investors Do to Fight the Effects of Inflation?

One of the best ways for investors to curb inflation’s effect on their portfolios is to add investments, typically hard assets, that are likely to increase in value as inflation increases.

Real estate is an asset class that has a long-held reputation for being an inflation hedge because it has a unique combination of increasing income, appreciating value and depreciating debt that helps it keep up with rising costs. Real estate investment trusts (REITs) are one of the ways through which investors can add real estate to their portfolios. According to Nareit, “REITs have historically performed well during periods of moderate inflation in terms of market returns and operating fundamentals.”

Increasing Income - Because many leases are anchored to inflation, real estate rents and underlying values tend to rise with overall increases in prices. Just like the rental income for a property increases, the dividends that REITs may offer can grow with inflation and continue to provide potential income streams.

Appreciating Value - Increases in lumber and steel drive up new construction costs which in turn restrict supply and drive up prices in a growing economy that has a high demand for industrial, multifamily, retail and other spaces. The value of real estate then begins to reflect its replacement cost, which is a direct depiction of inflation in the market.

Depreciating Debt – Inverse to the appreciating value of properties, the amount of debt owed can decrease in value with the rate of inflation; meaning the higher the inflation, the less real value the debt owed has, given a fixed interest rate.

While real estate has unique characteristics that may help hedge against inflation, it’s important to remember that, like all investments, investing in real estate or other alternative assets is not immune to risk, including illiquidity and a complete loss of capital. It’s important that you feel comfortable with the risks associated with investing in real estate and that you have conducted your own research. Work with your trusted financial professional to determine if such investments are the right choice for you.

Prepare for Inflation

In a time when we cannot predict much, one thing is certain: we don’t know how the economy acts when reopening from a global pandemic, and uncertainty continues to be the economic flavor du jour. As households prepare for an uptick in prices at least for the remainder of 2022, long-term effects of inflation are to feel more real and retirement savings worries may surface more than before. Investors may want to consider adding investments that hedge inflation, like real estate, to a diversified portfolio to help preserve the value of their money.

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The views and opinions expressed in this commentary reflect Modiv Inc.’s (together with its affiliates, “Modiv”) beliefs and observations in commercial real estate as of the date of publication from sources believed by Modiv to be reliable and are subject to change. Modiv undertakes no responsibility to advise you of any changes in the views expressed herein. No representations are made as to the accuracy of such observations and assumptions and there can be no assurances that actual events will not differ materially from those assumed. The forward-looking statements in this paper are based on Modiv’s current expectations, estimates, forecasts and projections, and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any Modiv program or offering. Alternative investments, such as investments in real estate, can be highly illiquid, are speculative, may not be suitable for all investors, and there is no guarantee that distributions will be paid.