How Inflation Affects Your Investments
Inflation is a term that we have become all too familiar with lately. From the grocery store to the gas pumps, and almost everywhere in between, we have all felt the dreaded effects of inflation. Unfortunately, though, many people don’t understand the root causes of inflation and why we’ve been experiencing so much of it lately. In an effort to provide some clarity, we’ve summarized some of the most important things you need to know about inflation below.
What is Inflation?
Inflation is the overall increase in the price of goods and services in an economy. This results in consumers and businesses alike losing what’s called “purchasing power”, which is the number of goods or services they can buy with a given amount of money. Inflation can be caused by a nearly infinite number of things, however, the inflation we’ve been experiencing lately can largely be attributed to drastic shifts in demand, as well as supply chain and labor-related issues. Producers have had huge increases in costs over the past couple of years, which has left them with no choice but to pass these cost increases on to the consumer.
How Inflation Affects Currency Value
Inflation can also be viewed as the devaluing of a given currency, since you are able to purchase fewer goods/services with the same amount of money. Given the current international strength of the dollar, this may seem hard to believe. However, the incredible strength of the dollar we have seen recently can be attributed to the fact that inflation is much higher in other countries. Although inflation may seem high in the US, it’s currently much higher throughout most of the world.
How Does Inflation Affect Investments?
Generally speaking, during inflationary times, assets like stocks tend to perform poorly. This is because company’s input costs increase, which can’t always be passed on to the customer. Additionally, when inflation arises, central banks tend to increase the cost of borrowing money, which is also detrimental to company earnings. This makes it more costly for businesses to finance the growth and expansion of their operations.
On the flip side, increasing borrowing costs tend to bode well for bonds, since they are a form of debt. This leads to bonds performing quite well during inflationary times, so long as central banks take the right steps to curb the effects of inflation.
How Can I Protect My Portfolio from the Effects of Inflation?
Protecting your portfolio from inflation is pivotal, but it’s not as simple as it sounds. If you are keeping your wealth in cash, then it’s being eaten away by inflation every day. However, the prices of equities have not been a great store of wealth lately either. That’s why it’s more important than ever to have an ironclad investment strategy during these inflationary times. Urban Wealth Management helps clients tailor investment strategies that work for them and their families.