Your Guide to Inflation in 2021
We keep hearing about inflation on the news and we are clearly seeing it in the prices of goods. With more money circulation and supply and demand out of balance, inflation is on the rise.
We keep hearing about inflation on the news and we are clearly seeing it in the prices of goods. With more money circulation and supply and demand out of balance, inflation is on the rise. This means that the price of goods is increasing, and fast. How will it affect how far your money can go? More importantly, how can you work to combat the negative effects of inflation?
What is Inflation?
Inflation occurs when the prices of goods and services go up, but the value of your currency does not. It means that you have less purchasing power and have to spend more for the same items.
Inflation can be temporary or permanent, but it’s hard to tell while you’re still “in the moment.” Just like supply and demand, inflation is impacted by the amount of currency circulating, as well as access to goods and services.
Examples of Inflation
Let’s look at some examples of inflation.
Supply chain issues can lead to temporary lower production outputs for machinery. Since less machines are being produced, the supply is reduced but demand remains the same. Producers can charge more during this period due to scarcity. This leads to temporary inflation until the supply chain issues are rectified.
A dozen eggs cost $0.47 in 1921. One hundred years later, the average cost of a dozen eggs is now $6.06, but eggs have not become more scarce. The reason for the inflation is due to the value of each dollar going down over the last 100 years.
Impacts of Inflation
Due to the events of 2020, the central banks are circulating more money than ever before (hello stimulus checks).
One of the negative effects of inflation is that it can put low-income families under financial strain. Since inflation leads to temporary or permanently raised prices, these families will no longer be able to afford their usual groceries, fuel and living costs. Unfortunately, this also means that savings will suffer, since banks tend to reduce interest rates in times of inflation.
While it’s not ideal for savers, inflation can be very beneficial for borrowers. Since interest rates are poor, the motivation for saving money is also low. But the interest rates on loans are also very low. Therefore, individuals are more likely to take out a mortgage, finance a car or borrow a loan for another purpose.
How to Combat Inflation
One of the ways to combat inflation could be to invest your money. Once you’ve got an emergency fund or liquidity, investing is one of the most common ways to capitalize on inflation and have your money hold its value.
While investing is traditionally done to build wealth, it may also help you stay “ahead of the curve” when it comes to how far each of your dollars go. If inflation continues at its current rate, the value of your money will be cut in half over the next 35 year period. If the level of inflation rises, this will only speed up. Therefore, investing may help grow your money.
For short-term investments, TIPS (treasury inflation-protected securities) might be a better option. These are low-risk treasury bonds which are backed by the US government. Plus, they adjust forthe inflation rate.
If you’re getting curious about how to invest in order to try to keep up with inflation, I can help. Book a call with me here for personalized investment advice. As a chartered financial planner, I can learn about your individual needs and we can create a financial plan that suits your lifestyle.