The United States has experienced 5.4% CPI in June, which is the highest since the financial crisis in 2008. The growth was far from the expectation of 4.5%. Although the Federal Reserve System (Fed) declared that inflation will only be present in a short period. But it’s hard to say how is inflation is going to be in the near future.
Inflation has an impact on your wealth indeed. Sometimes it’s hard for us to explore the rise in the price of consumer goods. But in the long term, inflation means a lot to our personal wealth.
So what impact does it have?
Inflation has a time impact on our money. The purchasing power of $1000 today is more than $1000 after 10 years, $1000 after 10 years may only value at $800 today. The direct impact of inflation can be seen in the price of goods and services over time. A historical example was that the price of milk per gallon is USD 36 cents in 1913, a hundred years later, it rose to USD 3.53 per gallon. The price was ten times higher.
There are several reasons behind this high inflation.
Inflation is driven by supply and demand. During pandemics, the production of goods and the cost of transportation raises. Many supply chains or manufacturing capabilities were disrupted. This causes the reduction in the supply of goods and services which pushes the price higher.
The low cash rate can be considered another reason for the high inflation. To stimulate the economy during the recession, RBA keeps the cash rate at a low level. This means the mortgage repayments fall, leaving householders more disposable income and it’s cheaper to borrow, encouraging people to go into debt and spend more.
Anything we can do to protect ourselves against inflation?
The labor wages do not raise very often with inflation. During the short period booming of inflation, people’s purchasing power generally decreases. So what we can do about the high inflation?
Purchase commodities and real assets: Inflation means the values of these assets increase, holding the actual asset can increase your wealth. But take care, different assets have different risks, typically mortgage is a potential choice, they often raise in value when inflation is high.
Put your money in some investments: Make your money grows to fight against inflation. You can put your money into some low risks investment such as mortgage funds, bonds such as Treasury inflation-protected securities. Or you can invest your money into the stock market. Always remember, the investment carries risk, the higher the return, the higher the risks.
Inflation is not a monster that is threatening our wealth. As an individual, we can not avoid the inflation. But we can protect our wealth through smart allocations.
Disclaimer:
All contents presented in this blog have been prepared for informational
purposes only, and are not intended to provide, and should not be relied on for any personal investment, tax, or accounting advice. You should, before making any decision regarding any information, strategies or product mentioned on this blog, consult your own financial or accounting advisors to consider whether the product is appropriate for you, based on your own objectives, financial situations and needs.
Resources: https://www.investopedia.com/ask/answers/042415/what-impact-does-inflation-have-time-value-money.asp
