Inflation is a destructive condition where prices keep going up and the main causes for this are either excessive demand (where growth is too fast) or a push up in the cost factors (due to supply factors). In short, it is the consistent increase in the prices of basic goods and services. It can also be viewed as a scenario when the prices of everything rise and become more valuable except for money. It is also known that it s virtually impossible to reduce inflation.
In order to combat inflation, one of the standard procedures the government and the financial institutions do is to increase interest rates. As a result, depositors who enjoy high interest rates on their fixed term deposit, lose out due to inflation. In other words, if you bought a household item for $100 in 2011, the same would cost you $110 now if the rate of inflation is 10%. If you earn a fixed term deposit of less than or equal to 10%, then you are either losing out or spending the same amount as in 2011. In short, although your expenses are still the same, you are spending more. Therefore, unless your fixed deposit rate is more than the rate of inflation, you are virtually making a loss.
Hence, how should you tackle inflation?
The standard advice that people get from experts on coping inflation is to cut down on their lifestyle. By cutting down on your lifestyle, you reduce your eating outs, watching movies, visiting malls and reducing impulsive purchases and hence you are technically getting even with inflation. However, that should not be the method. Of course, you have to cool off on the expenses a bit, but this is the time to invest wisely. Avoid taking home loans, as interest rates are likely to be higher. A lot of people are unaware on the method of investment, but this is the best time to invest.
There have been various reports and studies that have indicated that the stock market is the ideal place to invest during a price rise. Many countries have noted that during inflation their currencies usually depreciate although their stock markets gain during this period. Whatever said, you must make certain that your rate of return on any form of investment is more than the rate of inflation. You have to also remember that even a company’s returns might be overstated due to inflation.
A person can invest in various avenues. They can either invest in agriculture-based funds or commodity funds or even in precious metals. Investors can also seek alternate avenues such as metals and mining or energy stocks. As commodity prices are also subject to economic policies, consumption and the political environment, their prices are hugely cyclical. And, there is also the possibility of currency risks.
You can also invest in precious metals like gold or silver or in gold feeder funds as it serves as a hedging tool during difficult times. However, an investor must remember that with gold, it is more of a value appreciation rather than generating any interest or dividends. However, over the years, gold has proven to be a solid investment option as it moves up in tandem with inflation. Therefore, it is certainly a hedge against inflation.
Many people search for opportunities when there is a hike in interest rates as this happens to be the best time for a long-term investor.
This guest post is brought to you by Nicole Wilson of cabletimenyc.com, a site that offers savings and current information on service with time warner.
I'm Louida from Atlanta, Georgia and I'm a mother of two daughters, blogger, and full time working mom at a Business Consulting Firm.
I love helping others learn how to start working from home on the internet free to supplement their current income.
I also blog at Productreviewmom.com
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