What Every Investor Should Understand About Inflation

There are so many factors to consider when making an investment. The cost, the returns, the circumstances in which the investment is made; all these should influence the decisions you make with your finances. One part of this puzzle that is increasingly influential in the modern market is inflation. Understanding the impact of inflation is crucial to making investments. Today we’re going to explore what the concept of inflation means for you.

The Definition of Inflation

Inflation is a basic part of any economy. In the simplest terms, it refers to when a good or service starts to cost more than it did previously. If you’ve ever heard anyone talk about how a movie ticket used to cost less than 50 cents in 1950, you’ve heard an example of inflation. It’s a normal part of economic growth. 

 

It might seem on paper that inflation would be a bad thing. Prices going up? Who wants that? In some ways, it can be a negative thing. If the cost of living rises, then the buying power of a dollar goes down, making a person poorer relative to their pre-inflation circumstances. 

 

However, inflation can also have positive impacts.

Upsides of Inflation

Inflation can work out beautifully for businesses. Though it can negatively affect consumers, a higher cost of goods equals a higher profit margin for the businesses they frequent. Businesses are able to grow instead of stagnate, which is mirrored in the economic growth we see in times of inflation.

 

Furthermore, it’s worth noting that typically, inflation of prices is reflected by higher wages for workers. The two factors balance out: consumers have to spend more money, but they also have more money to spend.

 

Inflation ultimately prevents the economy from growing stale. By offsetting the opposite economic force (deflation, which refers to when the prices of things goes down), inflation helps us by helping the growth of businesses and keeping cash moving through the various levels of the economy. This ultimately helps both consumers and businesses by staving off the effects of  a stilling economy.

What to Expect in the Future

A recent statement by the Federal Reserve states an average yearly inflation of 2%. This is a slight change from previous statements that suggested an across-the-board inflation rate of 2%: the key difference is that the newest statements reflect the fact that while the prices of some things are experiencing inflation, the prices of other things are remaining the same or even going down.

 

This stable rate of inflation is good in its predictability, and the Federal Reserve would like to keep it that way. That is to say that, should we one year experience a rate of less that 2%, measures may be taken to create a slightly higher rate the next year. In this way the overall process of inflation remains steady, and both businesses and consumers can keep their cool.

 

Considering the low rate of inflation in 2020 caused by the economic shutdown, it will become necessary to address the economic situation. In order to increase inflation and stabilize the economy, one thing you can expect is that we’re going to be printing quite a bit of new money.

On Printing Money

There are going to be new dollars in circulation, which will have a big impact on the spending power of your cash. With that in mind, it’s important to recognize that keeping a lot of cash might not be the most effective investment strategy at this time. 

 

A potentially better investment to consider is real estate. Things like rent prices and property values are often seen to keep pace with broader economic inflation. 

 

One thing that won’t change is the dollar amount of any debts you might have. 1000 dollars in debt is still going to be written down as 1000 dollars- however, you’re likely to end up with more dollars in your bank account and assets. In this way, you might find that this is a good time to address your debts.

Recognizing and dealing with the effects of inflation is the best practice for any investor. In order to make the most of your money, you need to know its value. So, keep an eye on that rate. You might just find that a little inflation is exactly what you need in order to give your finances some momentum.

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