Have you wondered the best way to beat inflation? Here are a couple of ways investors can do it.

Whenever a government creates new money, it increases the potential for inflation in its home currency. When the U.S. does it, it increases the potential for worldwide inflation, since the U.S. dollar serves as the main asset of central banks around the world. That’s one of the reasons inflation is now high, but there are three good ways in general to beat inflation:

1. Understand the major causes of inflation
2. Invest in resource stocks
3. Stick with blue chips

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Now let’s dive into each of these, so you understand more about how to beat inflation through the stock market.

1. Understand the major causes of inflation

The best way to beat inflation is to understand the major causes of inflation. The major source of inflation is today’s fiat money system. That’s where Governments around the world can create new money whenever it suits them. They can do that directly, by printing banknotes. Or they can do it indirectly, by allowing central banks to expand their credit by writing cheques on bank accounts whose only asset is the government’s borrowing capacity.

Whenever a government creates new money, it increases the potential for inflation in its home currency. When the U.S. does it, it increases the potential for worldwide inflation, since the U.S. dollar serves as the main reserve currency of central banks around the world.

On the other hand, the main anti-inflationary, or deflationary, influence is rising productivity. That comes out of expanding world trade and improving technology. China’s low-priced exports helped to hold back inflation in the past few decades. But Chinese exports may have less of a deflationary influence in the next few decades, due to rising Chinese wages. However, world trade is likely to keep expanding, and technology is likely to keep improving. That will have far more influence on world inflation than wage trends in China.

2. Resource stocks, though volatile, tend to rise with inflation

The resource sector is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits at resource companies. When the economy slumps, resource prices fall, and this drags down resource profits and stock prices.

In addition to rising and falling with the business cycle, however, resource stocks have a history of rising along with long-term inflationary trends. This gives them a rare ability: they provide a hedge against inflation.

Back in the inflationary 1970s and 1980s, investors used to see this hedge-against-inflation ability as the main reason for buying resource stocks. Now they are thinking about it again. That’s because inflation has returned after waning for three decades.

3. How to beat inflation with resource stocks and blue chips

In times of low inflation, it’s particularly a bad time to give up on resource stocks. This highly cyclical sector goes through many booms and busts. You may feel resource stocks could languish for years. You may think it’s best to stay out of them until inflation moves up. But these stocks could give us an early warning of coming inflation. They may shoot up long before inflation revives.

Additionally, we advise investors to look for blue chip companies that are likely to pay off if business and the stock market are good, but that won’t hurt them too much during those inevitable periods when business or the markets are bad.

If you follow our three-pronged approach—diversifying across most if not all of the five main economic sectors, stick mainly to well-established companies, and companies outside the media limelight—then you can be almost certain of long-term gains in excess of what you’d get with any other investment approach.

In a deep or long-lasting market setback, your blue chip stocks will tend to go down, along with everybody else’s. But we think they will go down less and recover sooner. Meanwhile, you will collect steady dividends.

Key investment points: How to beat inflation by staying in stocks

In today’s economic climate, it might be tempting to jump out of stocks completely. That’s because after years of relative stability, inflation has come back to levels not seen in decades.

While the cost of just about everything is going up, nobody can predict trends in inflation or interest rates with any consistency. And I disagree with investors who think we are on the verge of a huge outburst of never-ending price increases.

Either way, though, it shouldn’t hurt your portfolio…if you have invested the right way.

The right way meaning  your portfolio is properly balanced among most if not all five economic sectors (Resources, Finance, Consumer, Manufacturing and Utilities). But at the same time, note that the resource, financial and consumer stocks you hold as part of a well-balanced portfolio can boost your returns during time of inflation!

Do have other strategies to beat inflation? What’s the best way you’ve learned?