Inflation at 7.8%: What To Do When Inflation Beats Your P2P Lending Returns

In autumn last year, inflation had doubled in six months to 3%, which prompted me to write The Impact Of Inflation On P2P Lending Results.

Another six months or so have passed, and the inflation rate has more than doubled again, hitting 7.8%. This means if you've not earned an average of nearly 8% over the past 12 months, you've got poorer, not richer, as your money doesn't buy as much.

While my last sentence might send your heart thumping, it's absolutely no reason to jump off your sofa, ready to take immediate action. None whatsoever.

So what are people with savings and investments to do in these times?

What to do

To a sensible, cool-headed and above all non-greedy lender and investor, inflation is usually going to be a storm in a teacup.

Accept the fact that your P2P lending results – as well as the results from other investments you hold – will diverge from the risks when inflation shoots up. This is because inflation is a factor that occurs outside of the intrinsic risk of your actual loans and investments.

In other words, the risk of losing temporarily to inflation isn't because the risks are rising in the P2P loans you hold. It's something beyond your control. The same risk of inflation occurs with all investments.

So you have a choice between continuing to lend and invest using the same sensible strategies you're already using, or chasing higher returns.

If you take that second path, it obviously means choosing loans and other investments that have greater intrinsic risks. So you're combining the additional risks of inflation with the increased underlying risks of suffering losses due to your loans and investments going wrong.

Clearly, there's great danger in that approach. It's not an investor's job to take large risks. That is the job of the speculator or gambler. Investors, including those doing P2P lending, can achieve highly satisfactory results without holding a zealous goal of beating inflation at all times, in every given month or year.

So don't base your strategy on short-term movements in inflation or the economy. Instead, be patient. Don't give up on your core, safer lending accounts with lower rates either. Maintain a decent spread of lending accounts and loans. As pointed out more extensively in The Impact Of Inflation On P2P Lending Results, it won't take long before you catch up with and overtake inflation again.

Isn't there a safe haven I can switch to temporarily?

There is no asset class – no type of investment – that beats inflation of the money supply and rising prices at all times.

Not even gold or cryptocurrencies, or anything else that has often been touted as a great bet against inflation. Indeed, investments suggested for this purpose are remarkably unreliable.

Sometimes, simply, the tide is against you and fighting against it is just crazy. Keep swimming sensibly and the tide will turn back in your favour soon enough. It's really not a big deal, provided you're investing in asset classes that usually, reliably, beat inflation – such as P2P lending – over reasonable timeframes. For P2P lending this might mean about five years and for the stock market 10-20 years.

Read:

The Impact Of Inflation On P2P Lending Results.

Peer-to-Peer Lending Vs Other Investments.