For an Inflation Hedge, Jump Aboard This Railroad Monopoly

You're probably leery of the scaremongers who continually warn about inflation, but this time around, you actually should be worried. Below, we outline the rising inflation risks and highlight an effective hedge that also offers growth.

February's Producer Price Index came in higher than expected, with producer prices rising 0.3%, above the average analyst expectation of 0.1%. Core producer prices increased 0.3%, versus the consensus expectation of 0.2%.

January's Consumer Price Index (CPI) also spiked higher, due to a 0.6% monthly increase in "headline" CPI, the figure for overall inflation. Excluding food and energy prices, the monthly CPI gain was 0.3%.

January retail sales also showed higher prices, jumping 0.4% since December and 5.6% since January 2016.

As an investor, you should be very concerned, because inflation shrinks the real rate of return on investments. If an investment earned 8% over a 12-month period and inflation averaged 1% over that time, the investment's real rate of return would have been 7%.

If you're looking for an inflation hedge, you should place great importance on the underlying asset's pricing power, which in turn makes virtual monopolies attractive. Ever since the 19th century's Gilded Age, railroads have fit the monopolistic description.

The high cost of fixed asset investment that's needed to install, expand and maintain railroad tracks, terminals and other infrastructure creates a high barrier to entry.

If a railroad has been around since the 1800s and keeps a lock on lucrative territory, it can recoup rising operating costs fueled by inflation by raising freight rates, fuel surcharges, and other fees. Customers who need to get their product to market have little choice but to pay up. Railroads also benefit from inflationary economic expansions, as demand for their services grows.

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