Welcome to the Topic “How to Fight Inflation Rate”
Recently, you've seen increasing pricing at the petrol stations and grocery shops. According to the Consumer Price Index, the cost of goods and services in the United States rose by 7 per cent between December 2020 and December 2021. Since 1982, that has been the biggest yearly gain, and it has everyone talking about inflation. Figures for the month of June 22 show a further increase in the inflation rate, which now stands at 9%.
The gradual rise in the cost of goods and services is known as inflation. With its Consumer Price Index, which routinely assesses prices for food, housing, energy, healthcare, and several other categories, the federal government keeps track of this data. Inflation in the United States typically ranges between 1% and 3% annually.
The economic situation is drastically different, with inflation running at its current high rate. All of a sudden, inflation isn't something happening underneath the surface. Many people lost their employment or had their hours cut back when the epidemic hit in 2020, and they had to be cautious with their finances. However, consumers now have more money available and are more likely to spend it as improving the labour market and stimulus programs have put money in people's hands. Resultantly, products are in greater demand than they are being supplied, which has caused prices to rise.
The strain on supplies and increase in consumer pricing are the results of these supply-chain issues and people having more money to spend. And now that Russia has invaded Ukraine, we are experiencing significant worldwide supply shortages of key Russian and Ukrainian commodities, which have resulted in even higher gas and food store prices.
A wide range of measures to fight the inflation rate primarily revolve around savings and placing your excess cash in good investment options.
Investing any extra cash flow you have, over and beyond what you have set up for an emergency, is one strategy to either keep up with or even get ahead of inflation.
Looking around and seeing things like rising interest rates, a collapsing stock market, or expanding inflation can make you question your previous decisions. However, in order to deal with the ups and downs of the market, an excellent diversified investment plan must be established right from the beginning.
Investing for the long term is the most important thing to focus on to fight rising inflation rates, even though you should keep track of current events.
The tendency of soaring inflation in 2022 has altered how we invest and live. You must adapt your portfolio and investment strategy to the shifting economic landscape and stock market movements to make sure you outperform inflation in 2022.
Diversify your Investments
Cash is one of the asset groups that are most susceptible to inflation. For instance, at an inflation rate of 9 per cent, holding $500,000 in cash will result in a loss of $45,000 in purchasing power.
Put your money in alternative investments like Oil and Gas, fine Wine, Real Estate, or Mutual Funds to avoid such financial losses.
These alternate options are often less susceptible to the volatility of the market. For instance, the fine wine asset class has established itself to be a strong inflation hedge, demonstrating consistent growth even during periods of economic instability. This demonstrates that fine wine is an excellent hedge against inflation. In addition to that, it is one of the best alternatives to expensive products. Fine wine portfolios increased by 5.28 per cent over the past year, despite the fact that the S&P Global Luxury Index
decreased by 8% during the same time period.
Another strategy that many successful investors, such as Warren Buffet, use to hedge themselves against the effects of inflation is to put their money into real estate mutual funds and real estate infrastructure. This is the case due to the fact that investments in infrastructure often keep their value, despite the passage of time.
Investing in I Bonds
The inflationary pressure has a significant impact on fixed income markets. As a result, you might want to fight the rising inflation rate by investing in bonds, which are often less sensitive to inflation, rather than fixed income equities. Despite having far lower yields than other asset classes, bonds can nonetheless help investors diversify and balance their portfolios.
For instance, bonds like TIPS (Treasury Inflation-Protected Securities) are inflation-proof since their principal grows as inflation does.
Series I Savings Bonds can be better if you have additional cash in your savings account, receiving an interest rate well below inflation. The timing of your requirement for the money will determine whether or not this makes sense.
For example, investing in I bonds can be a viable substitute if you have one to five years before you intend to buy a home. I Bond interest rates fluctuate in line with inflation and are now 9.62 per cent annually. Every six months, this rate is reset (upward or downward).
Each individual may invest up to $10,000 in Series I Savings Bonds each fiscal year, and you may add another $5,000 by using your tax refund. Before you can sell these bonds, you must own them for a full year. You will lose the prior three months of interest if you cash them in before owning them for five years.
Invest in Equities
While economists continue to discuss the complexities of inflation, the present episode's fundamentals seem crystal clear: Strong demand and expansion of the economy are the primary forces behind inflation. When there is an inflationary climate, corporate earnings tend to be strong, which helps the stock market perform well.
To be more explicit, stocks that are more directly related to economic activity and interest rates will likely outperform other stocks. For example, the relative valuations of bank stocks have been traditionally connected to investors' expectations of inflation. Businesses with pricing power in cyclical industries, including industrials and commodities, have a better chance of sustained revenue growth.
On the other side, equities with a history of performing well when there is little room for growth and inflation (like the digital economy) could be in greater danger.
To fight the inflation rate by investing in equities, maintain an appropriate balance between the two categories of stocks described above. Keep in mind that the climate for fixed-income portfolios will be difficult as inflation rates continue to increase.
Open a Savings Account
According to the general rule, if inflation is higher than the interest rate on your Savings Account, you are actually losing money since the inherent value of each currency unit is decreasing rather than increasing in real-world purchasing power terms.
Ask yourself what you want the savings account for; should I open a savings account, though, if I'm attempting to tighten my belt in the face of rising living expenses and want to make sure I have some money put away to weather the storm?
Just open an account and put at least six months' worth of savings in it. Even though most traditional savings accounts do not offer very high rates, earning a modest interest rate is better than nothing.
A prudent strategy is required to fight inflation rates, where a balance is maintained in accruing adequate savings by cutting the domestic budget, coupled with a well throughout plan for investing the excess amount. Placing excess amounts in a savings account is the least one can do; however, investing in stocks, real estate, or bonds could yield better results.
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Also Read: Best Ways to Fight Inflation