The CBO calculated the projected interest cost based on an assumption that interest rates will increase slightly from ~4.0% to 4.25%. Already the Treasury is reporting tepid demand for US debt, resulting in higher interest costs. What will happen if there are scant buyers for US government securities? The Treasury could increase the rate to investors (this would increase the deficit more) and/or the Federal Reserve could step in and print money to buy the government bonds to ease the over-supply problem. If the FED reversed its current course of reducing its balance sheet to buy securities, they would increase the money supply and drive inflation higher. This is a likely scenario.

From an investment perspective, where are the best places to invest given that inflation is here to stay and most likely will get worse? Historically, the best-performing investments during inflation cycles are real estate, commodities and consumer staples companies. The worst places to be invested include retail, tech companies and durable goods.

Multi-family real estate with long-term fixed debt is a very attractive hedge against rising costs. The interest cost will remain fixed while the top line can grow with inflation, creating a growing NOI stream and a higher valuation. And apartments are a basic necessity that consumers will continue to pay for while they dump other expenses. We believe every investor should have a balanced portfolio, including a healthy allocation to real estate even in non-inflationary times. But given the trends that we are seeing, it seems very prudent to ensure you have adequate exposure to assets that fare well with inflation.