In the last few years, prices have soared as consumers began to experience the pressures of inflation. Everything from groceries to interest rates has been affected by inflation, but what does that mean?
“Inflation” is a popular buzzword, but what does it describe and what causes it? This guide will answer those questions and provide some tips for protecting yourself against the effects of inflation.
What is Inflation?
Inflation is a general increase in the price of goods, services, and commodities over time. As prices rise, it becomes more expensive for consumers to afford the things they once could. Another way to think of inflation is a decrease in consumer purchasing power over time.
Prices for goods and services change due to factors like supply and demand, world events, and production costs. Calculating the average change for all items is too complex. Therefore, the Bureau of Labor Statistics uses the Consumer Price Index (CPI). The CPI uses a selected list of goods and services to measure inflation, making the process more practical and manageable.
Negative Effects of Inflation
Inflation can affect your life in several ways:
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Increased Price of Goods, Services, and Cost of Living
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As inflation rises, prices go up – partly due to the increase in the cost of producing goods and services and partly due to changes in supply and demand. This increase in the prices of goods and services is the most apparent negative effect of inflation because it’s the most visible to the everyday consumer.
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Decreased Purchasing Power
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One way to think of inflation is that the price of commodities increases, but another way to think of it is that it takes more money to purchase the same commodities. Both methods of conceptualizing inflation describe the same thing: when prices increase, buying power decreases.
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Decreased Savings
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When purchasing power decreases, consumers must spend more money to get the same things they had before. Typically, this means that most consumers have less available income to save since a more significant portion of their income must go to purchasing goods and services.
How to Protect Yourself and Hedge Against Inflation
What can you do about inflation? Unfortunately, there is very little you can do to personally stop nationwide inflation from occurring. However, there are some ways that you can make the best of the situation.
Consider Non-Cash Assets
Imagine a house worth $200k in 2010 but $500k today. If you had $200k back in 2010 and held onto it, you might still have $200k today. But it would be worth less than it was back in 2010.
On the other hand, say you decided to buy that house in 2010. Your $200k investment in 2010 could now be worth $500k in 2023’s economic environment.
This illustrates the importance of owning non-cash assets in inflationary times because when the purchasing power of $1 decreases, it’s good news for anybody who owns the things people might spend $1 on.
How iTrustCapital Can Help Investors Hedge Against Inflation
iTrustCapital offers non-cash assets such as cryptocurrencies, gold, and silver in a tax-advantaged IRA. To learn how iTrustCapital’s team of qualified experts can help, open an account today!
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