Let’s figure out why it is so bad, and why it is, however paradoxical this may seem, good
In our previous article dedicated to inflation, we described what it is, figured out how it affects people’s money, and what the main causes of this economic phenomenon are.
Today PaySpace Magazine will give you some hints on how to avoid the detrimental impact of inflation, or at least how to mitigate its effects.
But first, let’s figure out why it is so bad, and why it is, however paradoxical this may seem, good.
A lot of people wonder why they couldn’t just raise wages/payments so prices would seem the same, and consequently, wouldn’t it increase demand and hence production would receive a significant boost? The thing is, there are two types of inflation, such as demand-pull and cost-push inflations. The first option is when strong demand leads manufacturers to increase prices for their goods and services. The cost-push inflation, in turn, is when producers also increase their goods and services prices, but for other reasons, such as the increase in the cost of wages, raw materials, etc. In simple terms, demand-pull inflation is when “too much money is chasing too few goods”, while cost-push inflation is an “inflation of production costs”. So, what do we have when people suddenly gain more money overnight? They merely start to buy everything they have ever dreamed (and even everything they have never dreamed of). This results in increased demand, which accelerates price increases, because the manufacturers fail to keep pace with this strong demand and can’t satisfy it, they increase their prices instead.
So, talking about inflation, who are suffering the most and are most affected? First of all, we have those, who have savings, since the purchasing power of these very savings is affected and becomes weaker and weaker, as they are faced with prices increases. This also applies to bank deposits. At a time when inflation overwhelms bank interest rates, deposits will stop being profitable.
Those, who have fixed income are also affected. People with unfixed income make a profit only when their nominal income rises faster than prices for goods and services (in this case the real income increases).
Now, let’s talk about, at first glance, a weird thing. It turns out, moderate inflation is permissible, and even more, it is desirable for the normal development of the economy, modernization, and new goods production. Moderate inflation precludes economic stagnation. It stimulates consumers to spend money, instead of saving up, while it drives enterprises to invest in the development of new branches and innovation, with positive effects on the economy.
Nevertheless, inflation frequently crosses the “moderate” and “normality” line and becomes uncontrolled. It is no longer a progress and economy engine once it has crossed the cherished 2%-3% threshold. Nobody wants to lose money.
Here we’ve listed top tips on how to avoid inflation, or at least soften its blow:
1. Long-term investments.
Saving up is always great, but how can you save up keeping your money around the house when inflation makes them less valuable day by day? Here’s where long-term investments come in handy. For instance, let’s suppose you have taken out a mortgage to purchase a house. In this case, you can repay this mortgage using devalued (due to inflation) dollars. That is how you can use inflation to your benefit. It also works for redecorating/renovation of the home, capital expenditure for a business, and any other significant investments.
Commodities, such as oil, have an intrinsic value, which is why they are less vulnerable to inflation. It is all about demand and usefulness. Commodities will always be in demand, and they will also have an inherent value, in contrast to money.
3. Gold and precious metals.
Precious metals, such as gold, silver, platinum, and others are resilient to inflation. This all is due to their intrinsic value, which is similar to the situation with commodities.
First and foremost, property is a real asset. Whatever the exchange rate is, a house or piece of land will always remain a real asset. Having a property for rent, you’ll always have a passive income, which can be increased whenever you want (to keep up with inflation).
5. To start a business.
Right, this is probably the riskiest option, while at the same time, possibly the most profitable one. With this investment option you are very much on your own (not dependent on anyone), and if your business operates well and is profitable, the impact of inflation on your money is therefore minimal. You sort of operate on the same thread as an inflation rate, so your income level usually includes the current indicator of price increase. In other words, if you produce something/provide services, the price of your product/service will rise in accordance with general prices increases (considering the specific nature of a business, and the country you run a firm in).