3 Negative Effects of Inflation and How to Protect Yourself

Summary

Inflation reduces the purchasing power of money over time, making everyday goods, services, and living expenses more expensive. The three primary negative effects of inflation are rising prices, declining purchasing power, and reduced savings potential. To help hedge against inflation, many investors diversify into non-cash assets such as gold, silver, real estate, and cryptocurrencies, which may preserve value more effectively than cash during periods of currency erosion. Through iTrustCapital, investors can access cryptocurrencies, gold, and silver through tax-advantaged Crypto IRAs* or Premium Custody Accounts (for everyday investing), providing multiple ways to gain exposure to alternative assets that some investors use as part of their long-term inflation safeguard strategy.

What Is Inflation?

Inflation is a general increase in the price of goods, services, and commodities over time that reduces consumer purchasing power. 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.

Key Terms to Know:

Consumer Price Index (CPI): A measure used by the Bureau of Labor Statistics to track the average change in prices for a selected list of goods and services over time.
Purchasing Power: The amount of goods and services that can be bought with a unit of currency; as inflation rises, purchasing power decreases.
Cost of Living: The amount of money needed to cover basic expenses such as housing, food, and healthcare in a given location.

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.

What Are the Negative Effects of Inflation?

Inflation can affect your life in several ways:

1. Increased Price of Goods, Services, and Cost of Living

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.

2. Decreased Purchasing Power

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.

3. Decreased Savings

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 Can You Secure 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.

Why Should You Consider Non-Cash Assets?

Imagine a house worth $250,000 in 2015 but $550,000 today. If you had $250,000 back in 2015 and held onto it, you might still have $250,000 today. But it would be worth less than it was back in 2015 due to cumulative inflation eroding approximately 30% of the dollar's purchasing power over the past decade.

On the other hand, say you decided to buy that house in 2015. Your $250,000 investment in 2015 could now be worth $550,000 in today'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.

Types of Inflation Hedge Assets

Different asset classes have historically served as potential hedges against inflation:

Precious Metals (Gold & Silver): Gold and silver have historically been viewed as hedges against inflation and currency erosion. When the purchasing power of money declines, precious metals are often viewed as ways to help preserve value over time.
Real Estate: Property values and rental income often rise with inflation, potentially helping investors maintain purchasing power.
Commodities: Physical goods like agricultural products and energy resources may increase in value as general prices rise.
Cryptocurrencies: Digital assets like Bitcoin, with fixed supply limits, are increasingly viewed by some investors as potential inflation hedges due to their scarcity.

Comparison of Inflation Hedge Options

Asset Type	How It May Hedge Against Inflation	Considerations
Gold	Historically maintains value during currency devaluation; globally recognized store of value	No yield or income; storage considerations
Silver	Dual role as precious metal and industrial input; used in solar panels, electronics, and technology	More volatile than gold; industrial demand affects price
Real Estate	Property values and rents often rise with inflation	Requires significant capital; illiquid
Cryptocurrencies	Fixed supply (e.g., Bitcoin's 21 million cap) may defend against currency debasement	Highly volatile; speculative investment with risk of loss

How iTrustCapital Can Help Investors Hedge Against Inflation

Many investors look beyond cash when seeking ways to preserve purchasing power during periods of inflation. iTrustCapital provides access to alternative assets that have historically been used as potential inflation hedges, including physical gold, silver, and cryptocurrencies like Bitcoin.

Whether you're planning for retirement or investing in a taxable account, iTrustCapital offers multiple ways to access these assets. Investors can buy and sell digital assets and precious metals through a tax-advantaged Crypto IRA or through a Premium Custody Account (PCA), designed for buying and selling crypto outside of a retirement account. With both options available, investors can choose the account structure that best aligns with their financial goals while gaining exposure to assets that may help combat the effects of inflation over time.

Frequently Asked Questions

What causes inflation?

Inflation can occur for several reasons, including an increase in the money supply, rising labor and production costs, supply chain disruptions, and strong consumer demand that exceeds available supply. Government policies, interest rates, and global economic events can also influence inflation levels. While moderate inflation is a normal part of a growing economy, prolonged inflation can significantly reduce purchasing power. Understanding the causes of inflation can help investors make more informed financial decisions.

How does inflation affect savings accounts?

Inflation reduces the real value of money held in savings accounts over time. For example, if your savings account earns 2% interest while inflation is running at 4%, your purchasing power is effectively declining by 2% annually. This is why many investors seek assets that have historically outpaced inflation rather than relying solely on cash savings. Some investors use diversified portfolios that include assets such as gold, silver, and cryptocurrency to help preserve long-term purchasing power.

What assets have historically been used as inflation hedges?

Investors have historically turned to assets such as gold, silver, real estate, commodities, and certain equities during inflationary periods. These assets may appreciate in value as the purchasing power of fiat currency declines. More recently, some investors have also considered cryptocurrencies like Bitcoin because of their limited supply characteristics. Through iTrustCapital, investors can access physical gold, silver, and cryptocurrencies through either a Crypto IRA or a Premium Custody Account, depending on their investment objectives.

How is inflation measured?

Inflation is most commonly measured using the Consumer Price Index (CPI), which tracks changes in the prices consumers pay for a basket of goods and services. The Bureau of Labor Statistics publishes CPI reports monthly, providing insight into how prices are changing across the economy. Economists and policymakers use CPI data to evaluate inflation trends and make monetary policy decisions. Other inflation measures, such as the Personal Consumption Expenditures (PCE) Price Index, are also widely monitored.

What is the difference between inflation and hyperinflation?

Inflation refers to a gradual increase in prices over time, while hyperinflation is an extreme and rapid rise in prices that can severely undermine confidence in a currency. Hyperinflation often occurs when governments dramatically increase the money supply or experience significant economic instability. Historical examples include Zimbabwe in the 2000s and Germany during the Weimar Republic. While most developed economies experience normal inflation, hyperinflation remains relatively rare.

Can you completely secure yourself from inflation?

No investment strategy can completely eliminate the effects of inflation. However, investors can often reduce inflation's impact by diversifying into assets that have historically maintained or increased their value over time. A balanced portfolio that includes non-cash assets may help preserve purchasing power more effectively than holding cash alone. Long-term investors often focus on diversification and tax-efficient investing strategies to combat inflation's effects.

Why do some investors consider Bitcoin a hedge against inflation?

Some investors view Bitcoin as a potential inflation hedge because its supply is capped at 21 million coins, making it fundamentally different from fiat currencies that can be issued in larger quantities. This scarcity has led some market participants to compare Bitcoin to digital gold. However, Bitcoin remains a volatile asset and may experience significant price fluctuations over short periods. Investors can gain exposure to Bitcoin through iTrustCapital's Crypto IRA or through a Premium Custody Account for everyday investing.

Why are gold and silver commonly associated with inflation security?

Gold and silver have been used as stores of value for thousands of years and have often maintained purchasing power during periods of currency devaluation. Because precious metals are finite resources that cannot be created by central banks, many investors view them as potential hedges against inflation. While prices can fluctuate, gold and silver have historically played a role in diversified portfolios during uncertain economic environments. Through iTrustCapital, investors can buy physical gold and silver within a Crypto IRA or a Premium Custody Account and diversify alongside cryptocurrency investments.

*Some taxes may apply.

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DISCLAIMER

This article is for informational purposes only and is not intended to constitute investment advice in any way or constitute an offer to buy or sell any cryptocurrency, digital asset or security or to participate in any investment strategy.

iTrustCapital is a fintech software platform for alternative assets. iTrustCapital is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrustCapital is not affiliated with and does not endorse any particular digital asset, precious metal or investment strategy.

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