Thanks to the Middle East and Libya turmoil currently making headlines, the world’s economies may face major headwinds going foward as they try to grow their economies during this tepid recovery. Because of the rising prices of food and oil (inflation) economists fear that some economies will not to be able to adjust for this rapidly changing inflationaly environment.
Hitting closer to home, the duel shock of rising food prices and higher oil costs will have a direct impact on almost everything we purchase in our everyday lives. The obvious, being the food we buy and our energy needs will become more expensive. The not so obvious, everything else-for example anything that needs to be transported will have higher input costs which will eventually find itself into the price to the consumer.
So why is inflation so bad? Well alittle bit of inflation isn’t generally a problem but what needs to be considered is that inflation can eat away your purchasing power by making your $1 from yesterday worth less today and considerations in how you logically think about money should be adjusted to account for inflation.
For example, if $1 could purchase a case of coke 20 years ago and it now costs $10 to purchase a case of coke, all else being equal, one could safely say that that the purchasing power of $1 has decreased over time.
If your investment has returned 10% this year but inflation has increased over the same period by 5%, your REAL rate of return is only 5%. If your investment has returned 4% and inflation is 5%, you have lost money in ‘REAL’ terms.
During times of increasing inflation the value of your cash can very quickly diminish and should consider the following.
Some thoughts to help offset the burden of inflation….
Investing in gold, commodities, stocks, inflation protected bonds during times of rapid inflation is usually a wise idea. Taking on debt is also favourable during times of high inflation as the ‘real’ price of that debt will be worth less in the future when you pay back your debt. The price of your house will generally rise with inflation. Another, consider finding a job that builds in a cost of living adjustment into your yearly raises.
Note the title of my post, it’s not very affirmative for a reason. I have no idea what’s going to happen in the future, but high inflation is a possibility when one considers the facts.
-rapid increase in the money supply
-rising oil prices due to uncertainty in the Middle East, Northern Africa
-rising food costs brought on by environmental and financial circumstances