How an Upcoming Inflationary Period Can Affect You

Written by , May 24, 2011

How an Upcoming Inflationary Period Can Affect YouThe concept of inflation is pretty simple. It is defined as a general rise in prices in an economy over a given amount of time. There is some debate about the causes of inflation, but its effects on consumers are clear. It reduces the value of currency, which means that the same amount of money buys us a lower amount of goods and services than it did before.

The rate of inflation varies from year to year. Monetary authorities strive to keep inflation low and steady, but sometimes it rises due to circumstances beyond their control. Fortunately, rising inflation rates can usually be predicted by financial analysts, so we have some advance warning.

Here’s some advice on how an upcoming inflationary period might affect you.

  • In times of high inflation, the Federal Reserve often raises interest rates. That’s good news for your savings and investments, but bad news if you intend to borrow money. If a period of high inflation is imminent, you’ll want to go ahead and borrow while interest rates are still low unless you can afford to wait until they drop again. You should also consider placing your money in an online savings account as banks tend to increase the interest rates on this product as inflation goes up.
  • If you’re on a fixed income, increasing inflation could lower your standard of living. Your monthly check won’t go as far as it once did, so you’ll have to make adjustments to your budget.
  • Returns on low-risk investments such as bonds could be eaten up by high inflation. You can protect yourself from this phenomenon by purchasing inflation-protected securities – also known as TIPS. These types of government bonds tie the rate of return to the inflation rate, so you’ll get the same effective rate no matter how high inflation goes.
  • Shareholders may see higher dividends and a rise in the value of their stocks. That’s because businesses benefit from inflation due to higher profits, which in turn allows them to pay out more in dividends. This is particularly true for commodities. When inflation is exceedingly high, however, overall spending may decrease, resulting in a drop in the value of stock in companies that produce non-necessities.
  • Your non-monetary assets will increase in value. Prices of precious metals and real estate could potentially see large increases.
  • As you can see, inflation has both positive and negative effects. As inflation might be on the horizon you need to take heed. By making adjustments to your finances, you can stay ahead of inflation and possibly even use it to your advantage.

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