Inflation. In the past year, you’ve probably heard everyone, from central bankers to heads of state, discuss inflation. That’s because it has become a hot topic of conversation and financial experts and the general public are worrying about inflation. This economic factor, if left unchecked, can leave individuals with less purchasing power over time, thereby devaluing their hard-earned wealth. Fortunately, there are ways to stop inflation from taking away the power of your money, so you won’t be burned by what could happen in the future. Read on to see how you can beat inflation.
What is inflation?
Inflation is an economic phenomenon that is seen when prices rise and result in a decline in purchasing power of a nation’s local currency. Most economists agree that inflation can be directly tied to an increase in the money supply of a given fiat currency. This can happen in instances when a government attempts to support a stagnant economy by injecting more money to support businesses and individuals, just like what happened during the coronavirus pandemic.
Inflation is a problem, because as a result:
- One unit of currency is less valuable
- Holding cash is akin to losing money over time
- Consumers may begin hoarding goods (if inflation becomes bad enough)
But the interesting thing about this phenomenon is that on a day-to-day basis, most people don’t know inflation is happening. However, over the long haul, inflation can cause your wealth to decline without you even realizing it. Look at this graphic that shows how inflation has caused the US dollar to lose its value steadily over the decades:
How is inflation calculated?
Most nations calculate inflation by tracking the price of a basket of goods over time. In Europe, the Harmonised Index of Consumer Prices (HICP) is a basket made of consumer goods and services like food, clothing, housing, health, transportation, education, recreation, and more. The HICP is used by the European Central Bank as the indicator of inflation.
When the prices of goods in the HICP rise, inflation is on the rise, and when prices in the HICP fall, that means inflation is also on the decline. Over the past two decades, the HICP inflation rate has fluctuated generally between 1% and 3% with short periods where inflation swayed outside of this range.
How to combat inflation
Now that we know inflation causes us to lose wealth over time—in fact, inflation is often called ‘the worst tax’—how can we make sure not to fall victim to this economic principle? The following investments are considered good options to protect against inflation, thereby allowing you to retain your wealth over time.
Store-of-value assets are great for directly combating inflation. The most common store-of-value asset is gold, which has provided individuals a way to maintain their wealth no matter the economic conditions.
Earlier in this article, we showed how inflation causes the value of a fiat currency to decline over time, but when it comes to gold, the value of fiat currency also steadily loses its value. As you can see, the euro has continued to be devalued when compared to gold as a store-of-value asset.
As a digital alternative to gold, some believe Bitcoin is the newest store-of-value asset that will provide even more benefits than gold itself. However, Bitcoin has not yet maintained enough price stability to be considered a good store-of-value, so it still has a while to go before being a true alternative asset to combat inflation.
Whether it’s buying a rental property or a commercial property, real estate has also historically been a good inflation hedge. Unlike other assets, properties have intrinsic value in and of themselves, and during times of high inflation, real estate tends to hold its intrinsic value well. At the same time, property owners can usually raise rates in accordance with inflation, allowing them to offset any increase in inflation through higher rents.
But what if you don’t have enough money to buy real estate outright? You don’t have to be excluded. You can purchase other assets that invest in real estate, like index funds and ETFs. These publicly traded assets allow anyone to get access to real estate investment, no matter how much money they have.
Similar to real estate, commodities have their own intrinsic value, which holds up well over time. We already discussed gold as the ultimate store-of-value asset, but other commodities like silver, copper, aluminum, etc. make for solid investments to combat inflation.
Obviously, you wouldn’t purchase commodities to store them yourself. Instead, you can purchase derivatives of commodities, like options or futures, to hedge against inflation while not having to take possession of these assets outright.
Invest in yourself
When in doubt, the best way to combat any negative economic impact is to invest in yourself. This can be via education, further training, or even learning a new skill or trade. By investing in yourself, you are creating a better future that can outlast rising inflation and its consequences.
This is especially important in an ever-changing global economy. The skills you may have learned in the past could be slowly becoming obsolete, and with it, lowering your earning potential. By learning a new skill that is in demand, you are putting yourself in a position to be successful no matter what the future brings. Consider areas that are constantly in demand, like cybersecurity, software developer, data scientist, technical writer, or others.
Don’t let inflation trip you up
No one knows what the next decade will bring, so it always helps to be prepared. If you feel like you aren’t ready for a potential increase in inflation, try investing in some of these assets to keep yourself protected. Actually, even if inflation remains constant, you are still losing purchasing power over time, so keeping your hard-earned money in cash is doing you no good. Instead, opt for assets that hold their value no matter the economic conditions and can provide you a solid return for years to come.