People experience inflation—or an increase in the price of goods and services—in a number of ways. First, it has helped investment portfolios in areas like big oil. As oil prices increase, so do the profits of companies like Exxon. If you've had a position in a commodity exchange-traded fund (ETF) or mutual fund than you have been pleasantly surprised by their increase over the last year.
However, inflation can cause significant issues for people trying to put food on their table.
Big companies like McDonalds, the world's biggest restaurant chain, have been forced to increase menu prices by 1 percent. Double-digit increases in commodities like pork, butter, coffee, and lettuce has caused Cracker Barrel Old Country Store to increase its restaurant menu prices by 1.5 percent. J.M. Smucker, producer of the best-selling U.S. coffee brand Folgers, announced it would increase the coffee's price by 11 percent after the cost of beans doubled in one year.
Almost all the other commodity prices have increased as well. Beef prices are increasing partly due to the surging price of feed corn. Wheat futures are up 67 percent, raw sugar 44 percent, and corn, 98 percent.
Dry weather in Europe, China, and the southern Great Plains may cut crop yields, and floods along the Mississippi could delay the planting of corn, soybeans, and rice. Rising demand from China and India have also added to the higher cost.
Increasing fuel costs have hurt all areas of food manufacturing, from the harvesting side of agricultural commodities to the transportation of raw materials to these manufacturers, and then on to retailers. Increases in fuel are hitting everyone in their wallets, both commercially and personally.
Lower-income households experience even greater difficulties in times of high inflation. Think of it this way: As food costs rise, it takes up a greater percentage of your income. The less you make, the greater the percentage your food budget becomes. While you can change your habits and spend less money in some areas, you always have to eat.
The world's poor are being pushed further and further into poverty. In the U.S., the average family spends 7 percent of their income on food. In Guatemala, it's 36 percent, and in Kenya, it's 45 percent. Quite simply, the less you make, the more an increase in food prices will hurt you financially.
According to the Bureau of Labor Statistics, an American family making $15,000 to $20,000 of annual income spends 19.1 percent of their income on food, while those making $80,000 to $100,000 spends 9.4 percent.
But there may be a light at the end of the tunnel for lower income families. According to the FAO Food Price Index, food prices may have hit their high and could be on their way down.
If commodity prices have hit their high, the tables may be turning. Consumers may be seeing some relief, but investors could end up giving up some of those great returns. So for investors, here are two tips that could help you to hold on to your returns:
Use a long/short commodities fund. Managers can hold on to commodities he or she thinks could be increasing, and make money on those that could be decreasing in price.
Rebalance your portfolio. When any portfolio sector gets too high, take some of your gains off the table. Also, when you rebalance, you are selling something that did well (at a high) and buying something that did not do as well (at a low).
Good luck and happy investing.
Kelly Campbell , CFP® and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Alexandria, Va. Campbell is also the author of Fire Your Broker , a controversial look at the broker industry written as an empathetic response to the trials and tribulations many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.