With inflation rates rising across the world, many are naturally looking to regain control of their funds. Affecting everyone from business owners to retirees, and even governments, inflation is the silent killer when it comes to deteriorating personal wealth. In this article, we explore what inflation is exactly, and how you can protect yourself from it.
What is inflation?
Inflation is a term used to describe the gradual increase in the cost of goods and services in an economy, which results in the reduction of the purchasing power of your money. As goods and services rise in price, each unit of currency becomes able to buy less, thus reducing its purchasing power. Additionally to this, the rise in the cost of living tends to result in a deceleration in economic growth.
Inflation can be felt far beyond just household goods like food. It is experienced across the board, from services like entertainment, labour, and healthcare to metals and fuel even in transportation and electricity.
Two indexes used to measure inflation are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). CPI examines a basket of household goods and compares the overall prices to the prices registered the year before. Inflation is noted when the same amount of money cannot buy the same amount of goods as previously recorded.
The WPI measures and tracks the price of goods at the producer or wholesale level. This observes the increases in prices from the foundation up, looking at the raw materials instead of the final product.
Following the pandemic, inflation rates have increased around the world. In some cases, inflation rates are the highest they've been in 30 years, bad news for people's savings and salaries.
According to the U.S. Bureau of Labor Statistics (BLS), the Consumer Price Index For All Urban Consumers (CPI-U) recorded a 7.5% annual increase at the end of January 2022, the biggest increase to date since 1982. While, according to information available through the UK equivalent, the Office for National Statistics, a 12-month increase of 6.2% was observed in March 2022.
Inflation vs interest rates
Not to be confused with one another, inflation is the increase in the cost of living while interest rates determine how much money you can earn/pay as a lender/borrower. Inflation and interest rates typically rise and fall together, with an increase in one generally creating an increase in the other.
The different types of inflation
There are three main types of inflation which are categorised as demand-pull inflation, cost-push inflation, and built-in inflation. Below we outline the differences between the three.
Demand-pull inflation is when an increased supply of money leads to an increased demand for goods and services at a pace faster than the economy's production capacity. The increased demand and limited supply result in price rises.
Cost-push inflation is the result of increased costs of raw materials and production processes, leading to an increased price in the final product and other consumer prices.
Built-in inflation is created by a wage-price spiral where consumer prices rise leading workers to demand higher wages which in turn increases consumer prices.
How to manage funds and navigate inflation
Inflation is an inevitable part of life, however, there are still ways in which one can protect their funds from deteriorating in value.
Invest in stocks
Stock markets provide much better returns than traditional interest-bearing savings accounts. While managing the stock market is a relatively complicated endeavour and requires more energy, stocks, and ETFs can earn up to 7% annual returns which would both increase your capital and beat inflation. Be sure to seek financial advise from a professional should you choose to go in this direction.
Invest in property
Property prices tend to increase in value over time. While they require a substantial payment of capital, these can pay off in the long run.
Invest in commodities
Precious metals like gold and silver, as well as agricultural products and energy resources, offer potential opportunities for preserving wealth during economic uncertainties.
Managing inflation is integral to maintaining financial stability. Inflation is an inevitable part of the modern economy, however, there are ways to minimise its effects on your savings. Stocks, property, and commodities are all viable options to ensure your personal wealth is protected and continues growing. Be sure to seek financial advise specific to your financial situation should you be interested in any of these pursuits as they all carry a degree of risk.
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