The Two Types of Inflation: What You Need to Know

Inflation refers to the rising prices of goods and services, which typically happens gradually, however, the current inflation rate is far from gradual. At the time of this writing, the country is dealing with two types of inflation: demand-pull inflation and cost-push inflation, both influencing your purchasing power. Let’s discuss these types of inflation, the conditions that cause them, and how investors like you can hedge against them.

What is Demand-Pull Inflation? 

Demand-pull inflation is the most common cause of inflation. It occurs when the aggregate demand for a good or service exceeds the aggregate supply. Sellers can meet that increase with more supply, but if the additional supply is unavailable, then the sellers can raise their prices. If something is in short supply, sellers will generally ask people to pay more for it.  

There are a few reasons why demand-pull inflation occurs, this includes: 

  • Growing economy: When the economy is booming and unemployment is low, consumers typically earn and subsequentially spend more money. This drives up aggregate demand throughout the economy, which can lead to higher prices. 

  • Government spending: Government response to economic conditions, including providing a stimulus during the economic downturn or providing tax breaks can impact how much money people spend on goods and services. When the government spends more freely, prices typically go up. 

  • Inflation expectations: Inflation expectation refers to the rate at which people expect prices to rise in the future. When consumers expect inflation soon, they tend to start buying more now to avoid paying higher prices later.

What is Cost-Push Inflation? 

Cost-push inflation is a result of supply conditions, rather than demand. It occurs when the costs of delivery products or services increase, but demand is unchanged. Cost-push inflation often happens alongside demand-pull inflation. When raw materials prices increase, then businesses raise their prices to maintain profit margins, regardless of the demand.

For example, let’s say you love steak tacos from your favorite restaurant, but the price of beef keeps going up. Eventually, they will have to raise the prices of their tacos regardless of demand. 

Another cause of cost-push inflation includes increased labor costs. This happens when there is a mandatory wage increase for production employees causing product prices to increase. Also, a work strike will likely lead to a decline in production. Natural disasters and government regulations can also make an impact. 

How You Can Hedge Against Inflation 

Inflation is a decrease in your purchasing power and the decrease in the value of each dollar in your pocket. This means it takes more money to buy the same product, asset, or investment. A growing economy will bring with it steady inflation, but economists and consumers prefer to see prices rise slowly, unlike what is happening now. When inflation increases faster than usual, consumers tend to worry about paying higher prices for gas, groceries, rent, and other products and services. 

Fortunately, there is a way to hedge against today’s current inflation, and that is investing in multifamily properties. Though any investment property can be a good hedge against inflation, investing in multifamily provides more protection due to the nature of the asset. Generally, rents reset every 12 months, and rent typically outpaces inflation. Those who live in multifamily communities are obligated to their lease, and over time the rent (and other income generated) can pay for the investment itself plus excess cash flow.  

 

Though inflation is currently rampant and at a historically high rate, you can use real estate to hedge against inflation to protect your capital and purchasing power, along with so many other financial benefits. At CF Capital, our experienced team can help you invest in the future. So, if you are ready to explore your options to passively invest in real estate, get in touch with us. 

Work Over Time: Let’s Talk About Asset Management…

“The role of the musician is to go from concept to full execution. Put another way, it's to go from understanding the content of something to really learning how to communicate it and make sure it's well-received and lives in somebody else.”  This quote by the famous musician, Yo-Yo Ma, resonates deeply with our team at CF Capital.

Though we do not think of ourselves as musicians nor are we particularly adept at creating original music, we do believe Yo-Yo Ma makes a point that is applicable to aspects of what we do everyday with CF Capital.  

Over the past weeks we have been speaking to many parts of our philosophy and process.  We discussed how we go from an idea to planning.  And how we go from planning to execution.  Although we believe our investment process is extremely important to setting the stage for a successful investment, ultimately none of it matters if we do not execute.

“Having a vision for what you want is not enough. Vision without execution is hallucination.” -Thomas A. Edison

Today we will discuss asset management, or what we would like to think of as the methods of execution.   What do we mean by this?  Simply stated, it is putting our business plan to action to deliver results for our investors, the community, and our residents.

At a fundamental level, outstanding asset management is effective management and leadership of our property management team. Asset management is also about communicating to help property managers make excellent decisions, while holding them accountable in an effort for all invested parties to achieve their goals.

At the end of the day, our goal has two explicit parts: 1) to protect investor capital; and 2) raising the value of the project, whether it is physically and/or operationally.

In order to achieve those goals we must “see things through” with a highly detailed lense with our property management team that is on the ground, taking care of the day-to-day with the property.  Our business plan is our guide for asset management.  Inside our ordinary expectations, we execute based on our business plan. 

However, if we have learned anything from real estate and in life, it is rare to have exact circumstances occur as planned.  Therefore, asset management isn’t just about managing the ordinary, it is also about recognizing problems and course-correcting when necessary.  Execution can only be successful if we manage the unforeseen things that occur within our communities, in addition to ensuring the collaborative team effort to accomplish our stated objectives.

We always “expect the unexpected,” and are ready to adapt when we are faced with a challenge.  This mindset serves us well as it prepares us for resiliency and ultimate success. 

The CF Capital team does everything to ensure that we are holding our own team accountable, acting as leaders, while focusing on the performance metrics in a detailed capacity.   The metrics reveal the effectiveness of our methods and show if we are gaining traction with income and expenses -- whether it is leasing or managing expenses or other income. We track key performance indicators, or KPIs, closely to ensure our efforts are ultimately being realized as results as expected in our business plan.

Another key part of asset management is implementing the capital expenditure plan as formulated in our business plan.

If we planned to make programmatic improvements to plumbing, for example, our team must coordinate with our property management company, subcontractors in the market, and the maintenance staff to ensure the successful implementation of this investment.  We also must make sure that the plumbing installation project goes as smoothly as possible with minimal cost and time overruns, and minimizing resident disruption.  If a problem comes up, we must provide guidance in the best way to solve the problem and further give our team the tools to make the best time sensitive decisions where appropriate.

For the sake of simplicity, we want our readers to take away that asset management may seem quite simple, but there are many variables that come into play. Our team is dedicated to being detailed, diligent and focused to execute in the long run through asset management. We believe this persistence offers peace of mind to our investors, employees, and residents of the communities in which we invest. 

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