Inflation is simply the rate at which prices of various services and goods rise. Inflation explains why products and services cost more today for the same amount than before.
Taking the American economy as an example, the government in June 2018 revealed a 2.8% jump in the consumer price index. This indicated the fastest increase since 2012 for a 12-month period.
Some of the factors that influenced the rise include housing, medical care and the cost of gas. Once inflation rises, it lowers the dollar’s buying power. This means the consumer will buy fewer products with the same amount of money.
The reason for this is mainly the hiked input prices while the profits and revenues reduce. This will, in turn, slow down the economy until such a time when there’ll be stability.
In contrast, stocks can be a good protector against inflation. Although it’s still advisable to research on the most viable stocks before investing your money.
You can do this by viewing various forums such as Investors Hangout. In paper, as inflation fluctuates, so should a company’s revenue.
The Global Markets Input
Global markets can cause serious losses to certain companies during a rise in inflation. You see, as inflation rises, companies may raise their prices to cover the rise.
However, if the company is competing at a global stage, then it may find it difficult to remain competitive since other companies in the same space may not feel the need to raise their prices.
Also, inflation affects investors’ earnings since prices rise but the company’s value remains stagnant. This means the financials are inflated by inflation since the earnings and revenues rise as inflation rises.
When inflation rates go down, so does the revenues and earnings. With these fluctuations, it can be difficult to get the real value of a company.
Then you have the Fed’s chief inflation-fighting tool. This tool works by making it expensive to borrow money and in turn, removes eliminates excess capital.
You see, when there’s too much money chasing limited goods, you increase the inflation rates. However, by reducing the amount of money in the market, you slow down inflation.
Does Inflation Affect investments?
Yes, it does and by a huge margin for that matter, especially if you have significant portfolio invested in fixed income securities.
As inflation rates rise, the dollar’s buying power reduces and for retirees, this can be detrimental since it only means the money will lose its purchasing power as the years go by. As such, financial advisors recommend investing in stocks as a way to beat inflation.
Cash is never useful under the mattress. It only decreases in value. For example, if you have $100 in the house, it’ll only buy goods worth $95 at the end of the year after a 5% inflation beating.
Therefore, the best way to shield yourself from the effects of inflation is by investing some of your assets in Treasury Inflated Protected Securities and other products such as bonds.
Also, as an investor, it’s vital to keep tabs with the interest rates on the volatile stocks. This is because increased Fed pressure will influence the inflation rates upward.