Inflation is one of the most well-known concepts in economics, referring to the increase in the average prices of goods and services. It is typically measured by using a consumer price index, with the changes and fluctuations believed to be the result of shifts in real demand for products, available supplies, or inflation expectations (which can, in a sense, be self—fulfilling). Spikes in inflation are most often regarded as a cause for concern as they bring uncertainty over the future, and in the event that the change is very sudden, consumers begin hoarding out of fear that the prices will increase even further in the future.
There are some benefits as well, such as allowing central banks greater freedom when it comes to monetary policies as well as a decrease in unemployment as a result of decreased unemployment as a result of nominal wage rigidity. The inefficiencies associated with deflation are also averted, while loans and investments become more common. Most economists believe that the best alternative is a steady and relatively low inflation rate, as it minimizes the risk of recession. Central banks have the responsibility to maintain the rate as stable as possible, typically via open market operations and by setting interest rates.
If you’ve been wondering about the best ways to ensure that your own finances won’t be severely impacted during times such as these, here are a few things to take into consideration.
Lessons from hyperinflation
There are many countries that are dealing with hyperinflation at the moment, a phenomenon during which inflation is not only astronomically high but constantly accelerating as well. However, even the people living in the regions with the weakest currency in the world have found ways to store value. In situations such as these, public savings are essentially wiped out while purchasing power collapses entirely. It is far more than just high prices; as the entire economy begins eroding, economic signals are distorted. It is typically followed by social turmoil as well, which arises naturally as a result of the hardships people have to deal with.
So, how do people manage to survive in such a society? It’s important to determine where inflation is coming from, how fast it is building, and where it is headed. You do this by tracking inflation metrics and assessing the impact. Using inflation-hedging instruments can help. These include treasury inflation-protected securities, inflation swaps, and derivatives. Many people residing in countries whose currencies have plummeted resorted to having their savings in a different currency that they deem safer. Some prefer offshore bank accounts while others are fine with bank boxes or even collecting banknotes.
Gold
Gold is largely considered to be a hedge against inflation, with many considering it a sort of alternative currency. This is particularly the case in areas where the local fiat is losing value at high speeds. Gold is a physical asset, and it is very rare for it to lose its value. The fact that it exists outside of the banking system is the feature that makes most people confident regarding the benefits it could bring. When currencies are strong or weak, gold stays the same.
It cannot be printed by central banks or other financial authorities, and it also cannot be created and brought to the market just like that. Slashing interest rates and printing money are well-established policies used by lawmakers from all over the world, but for those individuals for whom these changes don’t inspire much trust, gold has started to look like a safe haven. However, make sure not to become overly optimistic and end up making poor decisions out of a sense of overconfidence.
Gold isn’t infallible and entirely immune to price fluctuations. Dips can and do happen, so you must approach them cautiously, just as you would any other market. However, if a sizable economic slowdown is to take place, the price of gold starts growing again.
Real estate
Building a real estate portfolio will definitely sound like a gargantuan and unrealistic task if you’re struggling with money, but there’s a definitive way in which real estate can improve your life: by investing in a home for yourself. As an average buyer, your purpose should be purchasing a home with the intent of holding it, even if you don’t plan to live in the same place for over a decade. Real estate doesn’t really generate returns during the first weeks or months, requiring a considerable waiting period in order to record price growth.
If you’re not paying cash, you will most likely put money down and take out a loan to cover the remainder of the price. There are many kinds of mortgages out there, but the same fundamental principles apply to all of them. Home prices increase on an average year-over-year basis, which counteracts the effects of inflation quite directly. Having your own home will also provide you with some peace of mind and help you avoid issues such as steep increases in rent prices that will make it more challenging for you to make ends meet.
The bottom line
One of the best investments you can make is in yourself, as you need to be prepared for the uncertainties of a financial future that will pose challenges to your lifestyle and well-being. Your future earning power should be one of your top priorities, but what does that actually entail? The investment begins with your education and training so that you learn new skills and improve the ones you already have. This will allow you to keep up with shifting markets, make your wages more inflation-proof, and ensure that you won’t struggle to find a job.
Inflation reduces the value of the money you hold but there are ways to protect yourself against its negative effects. Make sure to look into the best ways to build a resilient portfolio and analyze the market constantly in order to determine what are the best decisions for you. Being well informed about what’s going on is the only way to move forward.