How to Protect Yourself from Inflation

How to Protect Yourself from Inflation

The annual inflation rate in the US rose to 8.6% in May of 2022 to its highest point since December 1981. Energy prices, food costs, and rents rose significantly caused of the global pandemic and the Russia- Ukraine conflict. As inflation has become one of the hot topics of today, in this article, we will talk about what it is, why it rises, and how to protect yourself from inflation.

What is Inflation

Inflation is the rise in the prices of goods and services over a given period of time. Economists typically measure inflation by tracking the price of various things we call the Consumer Price Index. The Consumer Price Index is the collection of the prices of thousands of everyday things consumers purchase. Imagine you got a 300% pay increase, but at the same time, all the items, services around you cost 3 times more. It means that the pay raise does not make you more decadent than you used to be.  Inflation can make anything more expensive, from bread in-store to car washing service. Regarding views towards inflation, they are both positive and negative views.

Moderate inflation is generally beneficial to equities because it is linked to good economic growth, increased profitability, and stock price increases. However, if the economy overheats and inflation goes too high, things can rapidly get ugly for stock market investors.

Reasons behind Inflation

There are two types of inflation: demand-pull and cost-push.

1. Demand-pull inflation

Demand-pull is the most common reason behind rising prices. It happens when consumer demand is greater than the economy’s ability to meet those demands. There are several factors for this: producers cannot establish the necessary manufacturing capacity. They may also be unable to produce it due to a lack of trained employees or scarcity of raw resources.

A growing economy also can be one of the causes of demand-pull inflation. When people earn more and become more confident, they tend to spend more. People begin to expect inflation when prices increase. Consumers are motivated to spend more now to prevent price rises in the future. As a result, a little inflation can have a positive impact.

2. Cost-push inflation

The need for goods stays the same. It only happens when there is a supply shortage and sufficient demand for the manufacturer to raise prices. Meanwhile, the supply of goods decreases due to the higher production costs. As a result, the increased production costs are passed on to customers in higher pricing of goods.

For instance, in March, the container ship got stuck in the Suez Canal and brought global trade highly affected from it. It took six days to be freed and is estimated to have caused around $6bn of losses for international business. Moreover, the pandemic in 2020 can be a profound example of the causes of cost-push inflation.

Natural catastrophes can also damage industrial facilities, causing temporary cost-push inflation. Natural resource diminishing is a growing source of cost-push inflation. Overfishing, for example, has decreased the availability of seafood and raised costs.

How to Protect Yourself from Inflation

1. Invest in yourself

Investing in yourself is the best investment you can make to prepare for an uncertain financial future. This investment starts with good education and continues with skill maintenance and acquiring new skills needed in the not-too-distant future. Staying on top of a company’s evolving demands may help you not just inflation-proof your income but also recession-proof your career.

2. Focus on Inflation-Favorable Sectors

Credit Suisse looked at areas where inflation was predicted to rise and which segments of those markets performed best during such periods. They discovered that if the S&P 500 was predicted to rise 0.45% on an average day, the energy sector was expected to rise 0.86%. Furthermore, financials are expected to rise at 0.68%, and materials, at 0.62%, are two more categories with the potential to excel. Investing in these industries will help investors to hedge their investments against inflation.

3. Make payments toward your home-buying goals

Real estate is usually an excellent investment when it is done for the right reasons, such as buying a home to live in. When a buyer’s purpose is to profit from the property they just purchased, problems arise. Although professional real estate investors might uncover the hidden potential in houses, the ordinary individual should buy a property to stay in it for at least a few years. Real estate investments seldom provide a profit in a matter of months or weeks; instead, they need a lengthy period of waiting for prices to rise.

Thus are three tips on how you can protect yourself from inflation. Of course, there are some other ways too. By being aware of the potential of inflation, you should start protecting yourself earlier.

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