Investors Need to Hedge the Bet of Inflation with a Proactive Stance

Investors Need to Hedge the Bet of Inflation with a Proactive Stance January 7, 2022

By Jonathan Hipp

At last, it seems that COVID, while still a major threat, no longer dominates the 24-hour news cycle. But as we normalize under new rules of engagement in this post-pandemic world, we as business leaders now must pivot to the next threat: inflation. 

Back in July, Federal Reserve Chair Jerome Powell proclaimed inflation to be of short duration. At the time, the plan was to keep interest rates at a level that would rein inflation in at 2 percent.

And how is that working out for us? The current rate of inflation is 6.8 percent, the highest it has been since June of 1982, according to Trading Economics. With one theory out the window, how long can we hope to cling to the prospect of ongoing low interest rates? Monetary policy by necessity has to come into play as long as inflationary threats remain. 

And just to state the obvious, there is an inevitable domino effect that exists from inflation to interest rate hikes to cap rates. Assuming a lag between interest and cap rates–and acting on that assumption–is playing a dangerous game that could leave would-be investors out in the cold. This is especially true if the transaction in question involves new construction, which brings with it its own time frame considerations. Another potentially dangerous game comes in transactions involving flat leases, a much less attractive option in an increasingly inflationary environment than leases with healthy escalations built into the primary term and in options.

There is a seemingly odd but factual corollary between the COVID pandemic and inflation. We now know how to deal with unknowns. We know how to work within the twisting confines of the COVID pandemic, and we can handle the ongoing threat of variant strains because of the knowledge and experience we have gained. 

How much better, then, can we handle the threat of inflation? How much better is our experience here than in a global business shutdown? Certainly, as any investor who has logged time in this business knows, we must bank on our knowledge and experience. We know how far out on the risk scale we need to be.

That experience indicates to us the importance of an informed speed to market. Now is the time to act. Now is the time to hedge our bets before shifting monetary policies bind our hands. 

We cannot tell the Fed how to respond to what is clearly a rising risk of inflation. But no one knows better than us how to navigate through it.