What is Inflation? How to beat it?
What is liquid cash? What is it made of? The answers to these questions are fairly obvious, but aren’t given much thought by the masses.
There is a thin line that separates a rectangular piece of paper and paper currency. This thin line is nothing but perceived value. The majority of the middle class and the poor value these pieces of paper so much as to spend two-third of their lives working for it, only to see this thin line fade away inch by inch.
In economics, this phenomenon is known as inflation. In simple words, inflation is the erosion of the value of the local currency, due to the rise in prices. Unlike hyperinflation, in which the general price level rises even more rapidly than the money supply as people try ridding themselves of the devaluing currency as quickly as possible, inflation occurs at a fairly stable rate.
How Inflation affects savings:
Saving money is a norm that is practiced everywhere in society. From children saving pocket money in their piggy banks to adults storing cash in their savings account. Although there is a huge difference between the two, there are problems with both of these habits.
- Inflation in first world countries such as the United States, the United Kingdom and Singapore usually lies between 1 to 3%, however, this number may vary for developing countries. So, if a toddler saves $100 in a piggy bank, the money may not be able to buy as much in the next 20 years. While the toddler hasn’t lost any of his money, he/she is left with a smaller value because inflation has reduced the spending capability.
- If one creates a savings account, some percentage of interest may be earned on the money saved. When inflation is high, banks may increase the interest rates, but the savings may not grow fast enough to completely offset the inflation loss.
Keeping track of inflation rates is crucial, especially in second and third-world countries. Knowing earlier is better, as currency can be traded before inflation gets worse.
“The surprise numbers that came out are not due to any weakness in the economy. The economy is crushing it. Businesses are booming. If you think about hospitality, you can’t get a reservation in New York anymore”
Factors that affect Inflation:
There several factors that affect the inflation rate:
- Industrial output: The more the industrial output is, the lower are the prices. Similarly, the lesser the output, the higher are the prices.
- Employment: If employment shoots through the roof, it leads to employers fighting over workers, which leads to higher wages and higher prices. The prices rise because of employee spending; typically, the more an employee earns, the more money is spent by that employee on consumer goods. On the other hand, too little employment leads to employees fighting over jobs, which leads to lower wages, and in turn leads to lower prices.
- Circulation: More wealth in circulation leads to higher prices.
- The velocity of money: If cash flows at a faster rate in one sector of the economy, the prices related to that specific sector increase.
Ways to combat Inflation:
Not every poor or middle-class citizen keeps their cash idle in a drawer or bank account. This cash may be invested in some assets, and the investor may be collecting the returns. Investing in assets that have tremendous global value always helps during tough economic conditions, but it depends on the type of investment in question. Commodities, annuities and stocks of well-to-do companies are a few simple investments to combat inflation. To diversify, some investors choose to add inflation-indexed investments to their portfolios.
All in all, inflation is an economic force that can never be avoided, but sufficient planning and strong investment strategies can help minimize the impact of inflation.
What is Inflation?
Inflation is the general increase in the prices of goods and services in the economy over time that corresponds with a decrease in the value of money.
How to beat Inflation?
Sufficient planning and strong investment strategies can help minimize the impact of inflation
- How Inflation affects savings.
- Factors that affect Inflation.
- Ways to combat Inflation.