Yes, it is possible to make a profit in a high inflation market and earn more than inflation.

High inflation can decrease your purchasing power if your income doesn’t increase at a higher rate. How can you beat inflation and make a profit? Here are the details.

How To Make Profit in a High Inflation Market

In India, the annual inflation rate was 7.79% in April 2022. Since May 2014, this has been the highest inflation rate. Food inflation also jumped to 8.38%, the highest since Nov 2020. For the 4th month in a row, the inflation rate is more than 2-6% from the prescribed tolerance limit of RBI. A high inflation rate decreases your purchasing power. It also eats away your profit margin from fixed incomes, such as fixed deposits and other guaranteed income schemes. Is it possible to make a profit in a high inflation market and manage your personal finance? Let’s explore. To know the definition of inflation, click here.

Can You Make a Profit in High Inflation?

Yes, you can make a profit even when there is high inflation. Various types of assets perform significantly well in higher inflation rates. 

It has been seen that tangible asset classes such as commodities (gold, in particular) and real estate work as inflation hedges. You can also maintain the buying power of your portfolio with the help of certain specialised securities. For example, treasury inflation-protected securities, securitised debt, inflation-indexed bonds, and stocks belonging to specific sectors can maintain the buying power of your portfolio. 

Before getting into details about how you can make a profit in a high inflation market, it is essential to know more about inflation.

What is Inflation? How is it Calculated in India?

Inflation is an economic measurement. It tracks the changing rate of prices of a basket of goods (which has been standardised by the central bank or the country's government) against a particular year (called base year). In simple words, it measures the increase in the price of goods over time. The inflation rate is expressed in terms of percentage. 

In India, inflation is calculated with the help of two indices:

1. Wholesale Price Index (WPI): It ​​considers the rate of increase in the combined wholesale price of a basket of goods (which includes 697 goods). As per India’s Ministry of Commerce and Industry, the basket of goods includes:

65% of goods from the manufacturing sector
20.1% goods from the primary sector, including foods
14.9% fuel and power
RBI considered WPI the main price index until 2014 to formulate its monetary policy. 

2. Consumer Price Index (CPI): It considers the rate of increase in the combined retail price of a basket of goods (which includes 260 commodities, including goods and services). In contrast to WPI, the Consumer Price Index considers the retail level prices. RBI shifted to CPI inflation measurement from WPI in 2014 during ex-governor Raghuram Rajan’s era. This transition was made because WPI neglected the service sector's price increase and the bottleneck in the wholesaler-retailer supply chain.

How Does Inflation Affect Your Income?

how does inflation affect income

When inflation rises, you have to pay more for the same amount of goods and services you were getting before. For example, you were buying a particular quality of rice at Rs. 40 per kg a year ago. If the inflation rate is 10%, you’ll now have to pay Rs. 44 per kg to buy the same quality of rice. 

Your cost of living increases with rising inflation. If your income doesn’t grow faster than inflation, your standard of living will fall. This is because you can now purchase lesser quantities of goods and services than you could a year back. 

If the inflation rate is too high, it can adversely affect the economy. The tolerant level of inflation, as per RBI, usually hovers within 4-4.5%. Global Data forecasts that the CPI in India will be 6.04% in May 2022, which was 5.14% in May 2021. 

Top 3 Ways to Make a Profit in a High Inflation Market

3 ways

1. Invest in IINSS-C (Inflation Indexed National Saving Securities - Cumulative)

This is an inflation-linked securities savings scheme of the Central Bank of India. They are called Treasury Inflation-Protected Securities (TIPS). You can invest in these securities only if you are a retail investor. Inflation-Indexed National Saving Securities - Cumulative offers you two kinds of interest rates:

  • Fixed interest rate of 1.5% per annum
  • Inflation rate during the last 6-months

On a half-yearly basis, the interest rate is accrued and compounded. You’ll get the total amount (Principal Amount Invested + Compounded Interest) when you make the redemption. You can invest in treasury inflation protected securities in India through authorised banks like:

  • SBI & Associates
  • HDFC Bank
  • Nationalised Banks
  • Axis Bank
  • ICICI Bank

Here are some more ideas of debt funds that can help you beat inflation.

2. Invest in Gold

Historically, investment in gold has worked as an inflation hedge. You can beat inflation by investing in gold for the long term. Even in trying times, the price of gold has increased time and again. During the Covid-19 times, when stock prices plummeted, the value of gold continued to grow. In addition to buying physical gold, you can invest in:

  • Sovereign gold bonds
  • Gold ETFs
  • Digital gold

Learn more about the hedging power of gold against inflation here.

3. Invest in Real Estate

Real estate is another historically validated option of investment you have. You can buy real estate, and as a landlord, you can increase the tangible asset’s value and rents. If you are a small or medium investor, one of the best ways to beat inflation is to invest in commercial properties. Instead of buying real estate directly, you can invest in REITs (Real Estate Investment Trusts). 

Here are some more ideas on how you can make your investment portfolio inflation-proof.

Final Words

Suppose you want to make a profit in this high inflation market and also increase your purchasing power. In that case, you can invest in any one of the above-mentioned options. You can also invest in all of them. This will help you distribute your investable income among them to create a balanced investment portfolio to beat inflation.


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