What is Inflation and How Does it Work
Inflation is a general increase in prices and the fall in the purchasing value of money. It occurs when the demand for goods and services outstrips the available supply, pushing prices up. Inflation can be caused by a number of factors, such as an increase in the money supply, rising costs of production, or higher taxes.
Inflation erodes the purchasing power of money, which means that the dollar can buy fewer goods and services. Over time, inflation can lead to significant increases in the cost of living. For example, if the inflation rate is 2%, then a $100 item will cost $102 one year from now.
Causes of Inflation
There are a number of factors that can cause inflation. Some of the most common causes include:
An increase in the money supply
When the government prints more money, it can lead to a rise in prices as businesses and consumers compete for limited goods and services.
Rising costs of production
Increases in the cost of raw materials or labor can lead to higher prices for goods and services.
If the government imposes higher taxes, businesses may pass on the cost to consumers in the form of higher prices.
Wars or other international events
Global events can disrupt supply chains and lead to inflationary pressures.
Effects of Inflation on Individuals, Businesses, and Governments
Inflation fluctuates year-to-year. For the period between 1920—2021, inflation averaged 3.68%. Below is a graphic that details interest rates by year for that same period.
Click the image for an enlarged version.
Effects of Inflation on Individuals
Inflation can have a number of negative effects on individuals. For example:
- It can lead to higher prices for goods and services.
- It can erode the purchasing power of money, leading to a decline in standards of living.
- It can cause unemployment as businesses lay off workers in response to higher production costs.
- It can lead to social unrest as people become disgruntled with the rising cost of living.
Effects of Inflation on Businesses
Inflation can also have a number of negative effects on businesses. For example:
- It can lead to higher costs of production, eating into profits.
- It can make it difficult to borrow money, as lenders will be concerned about the possibility of repayment in inflated dollars.
- It can lead to lower demand for goods and services, as consumers tighten their belts in response to higher prices.
- It can make businesses less competitive globally, as other countries may have lower inflation rates.
Effects of Inflation on Governments
Inflation can also have a number of negative effects on governments. These include:
- It can lead to higher interest rates, as the government tries to combat inflationary pressures.
- It can lead to lower tax revenues, as businesses and individuals alike find themselves with less disposable income.
- It can lead to social unrest, as people become disgruntled with the rising cost of living.
- It can make it difficult for the government to borrow money, as lenders will be concerned about the possibility of repayment in inflated dollars.
How to Protect Yourself from the Effects of Inflation
There are a number of steps that you can take to protect yourself from the effects of inflation. Some of the most effective methods include:
Stocking Up On Goods When They are Available at a Discount
When prices are high, it can be difficult to afford basic necessities. However, if you buy goods when they are on sale, you can save money in the long run.
Investing in Assets that Maintain Their Value.
Physical assets such as gold and real estate tend to hold their value well in inflationary environments.
Putting Your Money Into Savings/Money Market Accounts that Offer High Interest Rates
This will help to ensure that your savings keep pace with inflation.
Diversifying Your Investments
By investing in a variety of assets, you can reduce the risk that inflation will have a negative impact on your finances.
Working with a Financial Advisor
A qualified advisor can help you develop a strategy for protecting your finances in an inflationary environment. *Secured Investment Corp. is not a financial advisor
How Inflation Affects Real Estate Investors
In this short video, CEO Lee Arnold, shares news from the Kiplinger Report and what RE Investors need to do to protect the value of their assets.
The Future of Inflation
The future of inflation is difficult to predict, but it is likely that it will continue to be a major issue for both businesses and governments. In order to protect themselves from the effects of inflation, it is important for individuals and businesses to be aware of the different ways to combat it. By following the tips mentioned in this article, you can help to ensure that your finances are protected in a time of high inflation.
Inflation is a serious economic issue that can have lasting impacts on your financial stability. However, there are steps you can take to help offset the impact of inflation on your savings and investments. One such step is to invest in real estate and other “hard” assets. Real estate prices typically rise with inflation, so purchasing property now could be a wise investment for the future. If you’re ready to learn more about strategies we have used to protect ourselves from inflation, contact our team today. We would be happy to discuss the options we have available to you and what has worked for us on the path to long-term financial security.
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