How to Combat Inflation

Combat Inflation — Bob and Tag Talk

Inflation is simply the rate at which prices increase over time.

It is usually a consequence of a high-demand, low-supply scenario that can mingle with market fluctuations and government policies to cause price rises.

Now, what can you as an individual do about inflation? Can you protect your financial assets and maintain enough capital flow during inflation?

Let us break it all down.

The Effects of Inflation

It is essential to know what happens during inflation to withstand inflation.

1) Money Value and Purchasing Power Reduces -

  • Inflation reduces your purchasing power and the value of money in terms of your savings and liquidity. Therefore, commodities and products you could comfortably afford will slowly go out of usual reach.
  • It increases the prices of usual commodities like wheat, rice, oil, vegetables, precious metals, and similar items. So, you may have to pay more for lesser quantities of the same commodity whenever inflation occurs.

2) Simulates More Spending -

  • More often than not, you may need to buy more things now to keep up with rising prices and the ever-decreasing value of your money.
  • So, this makes people stock up on commodities and investments to at least partially preserve money value.

3) Inflation Causes More Inflation -

  • When prices begin rising, they will continue to rise until the balance gets restored.
  • As inflation keeps rising, it amplifies those high spending activities where individuals and businesses stock up before their money loses more value.
  • In a worst-case scenario, hyperinflation could ensue, causing instability in the economy that can even collapse entirely.

But Can Inflation Be a Good Thing?

At this time, it is essential to understand that a little bit of inflation can help the economy.

Mild inflation rates can

  • boost employment,
  • generate more revenue for producers,
  • give you more returns for productive investments, and
  • enriches the economy overall

The key is to keep inflation in check to reduce the probability of hyperinflation.

And Central/Federal Banks keep inflation in check by first increasing the base rate of interest.

  1. When prices keep increasing and tend towards inflation, banks must find a way to stop the excessive spending in the economy.
  2. Banks control this spending and maintain the value of money by increasing the interest rate. This increase can deter companies and individuals from spending more and controls the amount of money circulating into the economy.
  3. Now, remember that compound interest applies to both assets and liabilities. So, with high-interest rates, people will focus more on making quality investments that give significant returns instead of borrowing/spending more.

What You Can Do to Withstand Inflation

1) Prioritise Increasing Self-Value -

  • As costs rise, people and businesses will be wary of spending more on unnecessary resources, services or goods.
  • Therefore, you must make sure that you stay in people’s minds as a necessary resource/spend. People should believe that spending money on you is worth every penny.
  • So, regardless of whether you are an individual or you maintain a business, consistently deliver on the quality and efficiency that justifies the money people spend on you.
  • This way, you earn more. And when you earn more, you can offset the rise in prices.

2) Invest in inflation-proof Stocks -

  • Inflation reduces the value of your money. So, it is natural to want to preserve that value. And the best way to maintain that value is through healthy investments.
  • Find “inflation-proof” stocks to invest in. These companies can withstand the rise in prices and still generate revenue even during inflation!
  • These are usually companies that sell or offer premium products and services. These products and services will still be in demand during inflation and maybe the best choice to combat inflation.

3) Buy Gold

  • In times of economic turmoil, gold acts as a cushion to fall back on. So, make plans to invest in more gold.
  • You can also buy Sovereign Gold Bonds (SGBs) or Gold ETFs over physical gold.

4) Hold Less Cash

  • Since inflation erodes the value of money, keep your in-hand cash to a minimum and use good portions of it for sound, long-term investments.

5) Invest in More Commodity-Related Assets

  • Since the prices of commodities like oil, natural gas, and agricultural products increase with inflation, the companies that make such commodities churn more profits due to the higher prices.
  • Therefore, investing in such companies can turn out profits for you too

Written by Tag | Edited by Bob