At the beginning of 2020, no one could say with certainty how much the pandemic would impact the economy. Now that 2021 is coming to a close, some of the effects of mass unemployment, global shutdowns, and devastated supply chains are becoming more evident.
Even without the unfortunate effects of the pandemic, inflation would still be on the rise. Now that the world has traversed through some of the most unexpected times in recent history, inflation rates are rising much more quickly than previously expected.
Keep reading to learn about what inflation is, what causes it, and how you can protect your capital against high inflation.
What Is Inflation and What Causes It?
Inflation is used to measure the rate at which prices of goods and services rise in the economy. When inflation occurs, it typically leads to higher prices of basic necessities such as gas, electricity, rent, and food, thus lowering the purchasing power of the dollar and having a negative impact on the average person’s life.
Inflation can occur either when production costs increase (due to a demand for higher wages and a higher price for raw materials) or when certain products suddenly experience high demand and consumers are willing to pay more for them. Another possibility of sustainable inflation will be the costs of transitioning from a fossil fuel-based economy to one that is net-zero carbon. Going green will not be cheap.
How Can You Protect Your Money?
It is certain that inflation will occur at one point or another throughout your life. This is why it’s important to be prepared by protecting the value of your capital. Here are some tips on how to protect yourself for times of high inflation:
- Invest in yourself: Investing in bettering yourself and increasing your financial literacy/investment knowledge is always a good idea. Your knowledge is an asset that you will always have regardless of the current state of the economy or your financial situation. This could include speaking to a financial advisor, taking economics or finance courses, or simply participating in self-teaching every day.
- Invest in property: Real estate does fluctuate in value and can have major low points (one look at 2008 makes this clear). Regardless, investing in real estate is a good way to preserve the value of your money over time, as it will allow you to take advantage of the cyclical nature of the real estate industry.
- Invest in a side hustle: Starting a small business or a ‘side gig’ is a great way of fortifying the value of the capital you already have and increasing your overall earnings. An even better alternative is finding a way to earn passive income that you can immediately reinvest in other assets that will bring in more money.
- Invest in stocks: Owning equities is one of the best ways to combat inflation. It’s presumed that good businesses will be able to continue thriving even when inflation occurs, which means that the money you invested in the company will continue to grow. It’s especially good to invest in commodity resource companies that enjoy a rise in prices during periods of inflation. It’s always prudent to get advice from a finance professional when using stocks to hedge against inflation to ensure you get as much as you can for your money.
Conclusion
It’s not a question一inflation will occur during your lifetime. This is why planning ahead and protecting yourself and your capital against inflation is always a good idea.
Several things can be done to help hedge against inflation and maintain the value of your hard-earned dollars. The first step is becoming more knowledgeable on the subject, and then you can start investing.