Inflation is an economy-wide, sustained trend of increasing prices from one year to the next. The rate of inflation represents how quickly investments lose their real value and how quickly prices increase over time. 澳洲幸运5官方开奖结果体彩网:Inflation also tells investors exactly how much of a return (in percentage terms) their investments need to make for them to maintain their 澳洲幸运5官方开奖结果体彩网:standard of living.

Understanding Inflation

The easiest way to illustrate inflation is through an example. Suppose you can buy a burger for $2 this year and the 澳洲幸运5官方开奖结果体彩网:yearly inflation rate is 10%. Theoretically, 10% inflation means that next year th♛e same burger will cost 10% more, or $2.20.

So, if your income doesn't increase by at least the same rate of inflation, you will not be able to buy as many burgers; however, a one-time jump in the 澳洲幸运5官方开奖结果体彩网:price level caused by a jump in the 澳洲幸运5官方开奖结果体彩网:price of oil or the introduction of a new sales tax is not true inflation, unless it causes wages and other costs to increase into a 澳洲幸运5官方开奖结果体彩网:wage-price spiral.

Likewise, a rise in the price of only one product is not in itself inflation, but may just be a relative 澳洲幸运5官方开奖结果体彩网:price change reflecting a decrease in supply for that product. ♏Inflation is ultimately about money growth, and it is a reflection of too much money chasing too few products.

Inflation occurs when the supply of money increases relati🌟ve to the level of productive output in the economy. Prices tend to rise because more dollars are chasing relatively fewer goods. Another way of stating this phenomenon is that the 澳洲幸运5官方开奖结果体彩网:purchasing power of each money unit declines.

With this idea in mind, investors should try to buy 澳洲幸运5官方开奖结果体彩网:investment products with returns that are equal to or greater than inflation. For example, if ABC stock returned 4% and inflation was 5%, then the 澳洲幸运5官方开奖结果体彩网:real return on investment would be minus 1% (5% - 4%).

Inflation and Asset Classes

Inflation has the same effect on 澳洲幸运5官方开奖结果体彩网:liquid assets as any other type of asset, except that liquid assets tend to✅ appreciate more slowly. This means that liquid assets are more vulnerable to the negative im𓄧pact of inflation. In terms of the broader economy, higher rates of inflation tend to cause individuals and businesses to hold fewer liquid assets.

Illiquid assets are also affected by inflation, but they have a natural defense if they appreciate in value or generate interest. One of the chief reasons most workers place money into stocks, bonds, and 澳洲幸运5官方开奖结果体彩网:mutual funds is to keep their savings safe from the♛ effects of in💞flation. When inflation is high enough, individuals often convert their liquid assets into interest-paying assets, or they spend the liquid assets on consumer goods.

So, you can protect your purchasing power and investment returns (over the long run) by investing in a number of 澳洲幸运5官方开奖结果体彩网:inflation-protected securities such as 澳洲幸运5官方开奖结果体彩网:inflation-indexed bonds or 澳洲幸运5官方开奖结果体彩网:Treasury inflation-protected seဣcurities (TIPS). These types of investments move with inflation and therefore are immune to 澳洲幸运5官方开奖结果体彩网:inflation risk.

The Bottom Line

Inflation refers to the general trend of an increase in prices over a certain period of time. As inflation occurs, purchasi𒐪ng power decreases, meaning that it costs more to buy the same good or service, or that the same amount of money buys fewer goods and services.

For investors, 澳洲幸运5官方开奖结果体彩网:returns on investments should be at least as high as the inflation rate. Otherwise, their investments are losing money 🎃even if they gain in dollar value. Similarly, individuals should ensure that their salaries keep pace with inflation; otherwise, they are losing buying power.