Well, this morning’s inflation report shocked — *checks notes* — absolutely no one who’s been grocery shopping lately.
The Bureau of Labor Statistics released its latest inflation report this morning, and it’s the worst report since August 2023.
The consumer price index rose 0.5 percent last month, and the bulk of the rise — 30 percent — comes from housing.
Here’s a chart from Bloomberg, with data from the BLS. Note that the January 2025 line (top right) is level with the August 2023 line.
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If you’re wondering how this compares to more recent months, here’s a BLS chart showing that we’re now at the highest level of inflation in the past year.
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Shelter costs? Up another 0.4 percent.
Grocery prices? Soaring, partly thanks to egg prices recording their largest jump since 2015 (spurred by the bird flu epidemic).
Even airfares and prescription drugs are taking off faster than anticipated.
Remember April 2021, when Fed Chair Jerome Powell said inflation would be “transitory”? Yeah, how’s that going?!
Here’s what fascinates me:
While everyone focuses on whether the Fed will cut rates (spoiler alert: they won’t, not anytime soon), we’re missing the bigger story.
Last year, I sat down with Bill Bengen, the MIT-trained former rocket scientist who developed the 4 percent safe withdrawal rule.
I thought we’d chat about safe withdrawal rates. Instead, he shared a perspective on inflation that massively shifted how I think about economic risks.
His key insight?
Don’t worry about recessions — they’re temporary and cyclical. Markets rise and fall. As long as you manage sequence-of-returns risk during the first five years of your retirement, you’ll be okay.
But inflation? That’s the real concern, because once prices rise, they stay higher forever. A recession inflicts temporary pain on your portfolio, while inflation’s impact is permanent.
“A recession, don’t panic. Inflation, do panic,” he said during our interview at the Bogleheads conference in Minneapolis. (Watch it on YouTube.)
That’s worth letting sink in.
The Market Is Sending a Clear Signal 📊
Today’s inflation data validates what the bond market has been screaming since last year.
In 2024, bond investors learned an expensive lesson about inflation’s staying power — the U.S. aggregate bond index produced a mere 1.25 percent return.
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But that headline number masks an even more telling detail: long-term bonds were absolutely hammered, with the iShares 20+ Year Treasury Bond ETF dropping 7.8 percent.
Translation: investors are worried about inflation.
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Why does this matter?
Because bond traders are typically the canaries in the economic coal mine. And right now, they’re signaling persistent inflation concerns, even as the Fed has begun cutting rates.
The evidence is everywhere:
🐻 Wall Street traders are pricing in far fewer rate cuts for 2025 than previously expected
🐻 Consumer sentiment has dropped 4 percent since December, according to the University of Michigan.
🐻 The share of consumers expecting massive inflation has remained elevated since 2023 and is close to its recent high
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It’s not everyday that this trifecta of voices speaks in unison.
When we see this kind of alignment between (1) Wall Street sentiment, (2) Fed policy, and (3) Main Street consumer concerns, it’s worth paying attention.
Where Should We Invest?
This leads to the obvious question:
How should we invest in an inflationary environment?
History offers some clear lessons here.
In periods of significant inflation — whether we’re looking at the Weimar Republic, Zimbabwe, or Argentina — one strategy has consistently helped preserve wealth:
Investing in tangible assets.
What are tangible assets?
These are physical assets you can literally touch: land, buildings, art, precious metals like gold and silver, and commodities like corn, wheat, cattle and coffee.
Tangible assets have intrinsic real-world value and utility. They’re the things people will always need and use, regardless of what the dollar is worth.
Among these tangible assets, real estate is unique. Here’s why:
When most people think about inflation protection, they focus on a single defense — like buying gold or TIPS.
But real estate doesn’t just offer one layer of protection. It offers FOUR distinct layers that work together, creating an economic shield around your wealth.
Layer 1: Home Value Growth
Like other tangible assets, real estate tends to appreciate when inflation rises.
Historically, home values rise at a rate that either keeps up with, or exceeds, overall inflation. (It meets it or beats it.)
Here’s a chart from LongTermTrends showing the rise in real (inflation-adjusted) home values over the last 50 years.
This chart compares the rise in the Case-Shiller U.S. National Home Price Index (the red line) against the Consumer Price Index (the black line).
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As you can see, real (inflation-adjusted) home values kept pace with inflation in the 1970’s, and then started exceeding inflation in the 1980’s. It’s been exceeding inflation at increasingly wider margins ever since.
Here’s the 100-year view:
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From these charts, it’s obvious that real estate is an inflation hedge, based purely on home value alone.
But here’s where real estate really starts to separate itself from the pack …
Layer 2: Persistent Demand
While gold sits in a vault and art hangs on a wall, real estate serves a fundamental human need.
People always need somewhere to live, regardless of economic conditions.
This means there will always be rental demand, even if people cut back on discretionary spending.
When consumers tighten their belts, they might skip dining out or cancel subscriptions. But housing? That’s non-negotiable.
This creates a natural floor for both property values and rental demand, even in challenging economic times.
This isn’t theoretical — just look at today’s inflation report. Even as consumers pull back on discretionary spending, shelter costs continue driving nearly one-third of all price increases.
Layer 3: Rising Rents
While property values rise with inflation, something equally powerful happens: rental income typically increases too.
If you’re a renter and it’s time for lease renewal, and there are no regulatory caps (e.g. if you don’t live in a rent-controlled apartment), you’re likely going to see your rent rise — perhaps significantly.
If you’re a landlord, by contrast, your income is rising with inflation.
It’s like having an inflation-adjusted payment stream that actually benefits from the very thing that most other investors fear.
Yes, you’ve also seen property taxes and insurance costs rise (which makes sense, since your home is worth more). But on balance, you’re the beneficiary of inflation.
This is especially true if you’re holding a fixed-rate mortgage, which leads to the fourth and final benefit:
Layer 4: You Repay the Home in Cheaper Dollars Over Time
Inflation sucks for lenders, which is why the returns on long-term bonds declined.
But inflation is fantastic for borrowers — especially anyone with a fixed-rate mortgage.
If you lock in a fixed-rate mortgage, inflation becomes your friend. As prices rise, you’re paying back your loan with increasingly cheaper dollars.
Think of it as getting a discount on your mortgage that grows larger each year inflation ticks up.
Assuming a fixed-rate mortgage, the carrying costs of holding that asset gets cheaper over time, in real dollars.
To summarize:
If you’re a landlord with a fixed-rate mortgage, you’re getting a quadruple benefit:
✅ You own an appreciating asset that historically rises with — or exceeds — the overall rate of inflation
✅ You own an income-producing asset with persistent demand
✅ Your rental income is rising with inflation
✅ You’re repaying your amortized mortgage in cheaper and cheaper dollars over time
Think about that for a moment:
Where else can you find an investment that not only protects against inflation through FOUR different mechanisms, but actually turns inflation into an advantage?
This is why sophisticated investors have historically turned to real estate during inflationary periods — not just as a shield, but as an opportunity.
