You may hear the term “inflation” used a lot in reference to the economy. It’s often used interchangeably with terms like “interest rates” and “the stock market.” However, inflation is its own distinct economic concept with far-reaching effects. In short, inflation is the sustained increase in the price of goods and services. But what causes inflation? Let’s take a closer look.
One common cause of inflation is an increase in the money supply. When there is more money chasing after fewer goods and services, prices go up. This is often caused by the government printing more money. Another cause of inflation is cost-push factors such as oil shocks or increases in taxes. These things cause the prices of raw materials to increase, which can lead to higher prices for finished goods. Lastly, demand-pull inflation can be caused by expectations of future inflation or by an increase in aggregate demand. When people believe that prices will continue to go up, they are more likely to spend money now rather than wait—this increased demand can lead to higher prices.
What Can I Do To protect myself Against Inflation?
There are a few things you can do to help protect yourself against the effects of inflation:
1) Invest in assets such as stocks, bonds, and real estate. Over time, these assets tend to go up in value at about the same rate as inflation – so you won’t lose purchasing power.
2) Keep some cash in a savings account or in a short-term CD. This way if prices for goods go up suddenly (such as if there’s a run on toilet paper due to a pandemic!), you’ll have cash on hand to buy what you need without having to sell an asset first.
3) Make sure your debt payments (such as your mortgage or car loan) are fixed-rate rather than variable-rate. That way if interest rates go up suddenly, your monthly payments won’t go up along with them.
4) Consider buying consumer staples such as food and household goods from bulk retailers such as Costco or Sam’s Club. These items typically don’t go up in price as quickly as other items since they’re not as affected by things such as fashion trends.
5) Check prices on big-ticket items before making a purchase. If you’re considering buying a home or a car, lock in today’s prices by shopping for a fixed-rate loan with terms of 15 years or less. Interest rates on long-term loans are usually more variable, so they can go up along with changes in inflationary pressure.