Have you ever wondered why the prices of products and services generally increase every year? This can be explained by the effects of inflation.

Inflation is basically a metric used to measure how much the average price of a set of products and services has increased over a certain period of time. So basically, its increase represents a reduction in the purchasing power of the consumer.

In other words, because of the way inflation works, $100 today is not the same as $100 ten years ago. This is easy to see when you look at the prices of the products in our day by day during those years.

An example would be the Disney parks themselves, in Orlandoin Florida, where a ticket cost $46 in 2000, and now costs more than $125. Thus, the money that is stored in the bank or under the mattress has its value diminished with each passing year.

When it comes to hedging against inflation, the investments are not valued in the same way. Although certain investments may seem promisingThe reality is quite different when inflation is taken into account and what you thought would generate a profit may even end up generating a loss.

In this understanding, the graphic below compares the CDI (Interbank Certificate of Deposit) with the IPCA (Broad National Consumer Price Index) from 1999 to 2017. If you invested in the CDI during that period you made gains above inflation.

However, inflation will often have eroded a large part of your gains. If we look at 2013 for example, the CDI yielded 8,06% and inflation measured by the IPCA was 5,91%. Therefore, your return real this year would have been only 2,15%.

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One of the main assets that are considered great "hedges against inflation are the real estate. In the financial market world, the term "hedge" is used to refer to protection, often being an investment that serves to offset potential losses.

An asset is considered a hedge against inflation if it provides a certain degree of protection against an increase in the general price level of goods and services in an economy over a period of time. It is for this reason that invest in real estate is considered a hedge against inflation, since the values of the houses and rents usually increase during inflationary periods.

If we look at the USAWe'll see how real estate prices have behaved in recent years, compared to inflation, because we'll be able to see the effect of the hedge we mentioned above.

The graph below shows a comparison of the valuation of houses in the US (in red) with the inflation rate (in gray) during the period from 1965 to 2016. Looking at this graph, we can see the protection that investments in real estate in the USA provided during that period.

Over the years, various studies have been carried out with the aim of really observing the sector's potential real estate as a hedge against inflation. A study by Markus Demary and Michel Voigtländer called "The Inflation Hedging Properties of Real Estate: A Comparison Between Direct Investments And Equity Returns" set out to analyze real estate as a hedge against inflation.

They made a analysis regression, where they divided real estate into three types: residential, retail and office. And with this, they came to the conclusion that a direct investment in residential property offers the greatest protection against inflation.

They believe that the reason for this is that homeowners have power and can therefore easily optimize rental payments.

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In addition to this, many others studies have already been done to test this hypothesis. For example real estate residential and commercial had a performance favorable as inflation protection properties in developed economies such as the US (e.g. in Fama & Schwert, 1977; Peyton, 2011) and in developing economies such as Nigeria (e.g. Bello, 2005, Ogunba Obiyomi & Dugeri, 2013).

Likewise, the sector real estate was seen as a good hedge in Austrialia (Leung, 2010) and Korea (Park & Bangs, 2012).

Besides being a hedge against inflation, the fundamental investment characteristics real estate include high cash yields and low correlations with stocks and bonds. The main arguments for including real estate include the following: market portfolio, diversification, high yield, performance attractive long term and potential inflation hedging.

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I have other questions! Who should I talk to?

In all these cases, The Florida Lounge can help you understand the impacts of events like this on the real estate market in Florida! Our relationship agents have expertise in real estate investment for Brazilians in the state of Florida and can accompany the entire process of acquiring your dream home, assisting with visa issues, bank accounts, remittances and much more. [/mpc_textblock][mpc_button mpc_tooltip__text="SW52aXN0YSUyMG5vJTIwc2VjdG9yJTBBaW1vYmlsaWFyaW8lMjBuYSUyMEZsb3JpZGE="]
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