What is Inflation and How can you Protect your Money from it?

Do you know over 43% of Americans are unable to make a living and afford basic expenses? Well, with the increase in prices it pretty much difficult to afford something now compared to the past. This rise in prices of goods and services such as food, housing, clothing, transport, and other essential products is called inflation which is usual in any economy. Though the trend of rising in price is common, some times its effects cause a huge loss to citizens of the country in which inflation occurred.

Taking some measures you can escape the effects of inflation and protect your money from it. Before you see how to protect your money from inflation, you need to know what exactly inflation is and what its effects are. So, that you can perfectly plan to protect your money from it.

What is Inflation?

The term Inflation is an economic term and it refers to an increase in the price of all goods and services. And the opposite of it is known as deflation. When the prices go up, the dollar value falls, thus making it difficult for you to buy something. The inflation is steadily on the rise for a long time which is why you can’t purchase a product for the amount you have purchased 5 years back. In fact, this is how people measure inflation. Inflation is generally expressed as inflation rate which means the rate of increase in inflation.

Officially, in the U.S, the Bureau of Labor Statistics measures inflation using the Consumer Price Index (CPI). CPI measures inflation by considering the rise in the price of goods and services that fall under the same category such as a single item of different brands (bath soaps of different brands).

Causes & Effects of Inflation

With the rise in inflation, the price of everything goes up. But this doesn’t happen every time. Sometimes your wages may not rise when inflation rise, which brings a difficult time for you to make a living. This can be simply called a decrease in the purchasing power of people. 

In contrast, if there is deflation, the purchasing power increases, people can buy more with fewer dollars and finally the economy rises.

Causes of Inflation

There are 2 causes of the rise in inflation. 1. Demand-Pull Inflation 2. Cost-Push Inflation. There is also a third one called an increase in the money supply. Meaning, too much circulation of money due to too much printing lowers the value of the dollar as it is available easily.

Demand-Pull Inflation

The first cause of inflation is demand-pull inflation. Due to an increase in the demand for a particular good or service, increases the prices, which also leads to the demand for an increase in wages. But as said in the beginning, if your wages don’t rise but there is an increase in the cost of living you will have to face financial crisis. Because you will have to compromise on some essentials due to inflation and may have to borrow for emergencies. You will have to, therefore, look for side hustles to make extra money.

Cost-Push Inflation

When there is an increase in prices for goods such as raw materials, or increase wages for workers then industries or manufacturers raise the prices on consumer products. This is to cover the money born by them. Say, if there is an increase in the price for grains, then the price for cookies, bread, etc also increases, hence consumers have to pay more. Therefore, people pressure their companies for an increase in salaries and if salaries are increased, purchasing power increases. Hence the demand for goods as people can afford naturally resulting in the rise in prices.

This process of never-ending impacts of cost-push and demand-pull inflation is known as Wage-Price Spiral.

Effects of Inflation

As said when inflation occurs, everything becomes expensive. Simply put, it has effects on your cost of living, wages, salaries, mortgage rates, and luxury. However, if there is a balance between inflation rate and growth of the economy, you can make living happily with everything under your control. That means, if it is not at an acceptable level, you will have to face issues such as

A decrease in purchasing power

You will have to compromise on many things you use in your everyday life as you can no more afford them. Therefore you need to pay attention to the effects of inflation and start protecting your money.

Read: How to make a budget

Increase in spending

In the other case if there occurs deflation, meaning loss of value of money. You tend to spend more than usual as you can afford many things. But if you keep spending it or saving it in your home locker, you gain nothing. Instead, if you can invest it for profits, you will be ready to face the next inflation. 

So, lets’ see how you can protect yourself from Inflation.

How can you Protect your Money From it?

As said, you will gain nothing or play the victim when prices rise next year or next month if you don’t properly protect your money now.

The only way you can protect yourself is by increasing your income and tracking your expenses. Ok, this doesn’t make sense for those who earn a steady income. But do you know what, anybody can invest in something profitable like real estate or stock market and increase their income?

So, start investing your money in the stock market by gaining some knowledge in it to protect your money from inflation. Fortunately, there are inflation-protected bonds like Treasury Inflated Protected Securities (TIPS) by the U.S Treasury that adjusts the interest rate accordingly.

The article you may find useful: 10 best budgeting apps  for every type of budget

Bottom Line

As inflation can change your standard of living and can even impact your travel plans for a vacation or everyday diet, it is important for you to keep an eye on the causes of inflation and changes in the inflation rate to protect yourself. As you have already learned that investing and generating more income can save your money from inflation, focus on learning, and investing in the stock market and real estate. The worth of a piece of land is always better than a piece of furniture, right? So, pay attention to long-term investments that can also yield your profits in the short-term, that way you can stay relaxed no matter what, inflation, or deflation.

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