how to protect your finances during inflation
there are a range of measures that individuals can take to protect their finances against inflation for instance one may choose to invest in asset classes that outperform the market during inflationary times this might include commodities like grain beef oil electricity and natural gas commodity prices typically stay one step ahead of product prices and price increases for commodities are often seen as an indicator of inflation to come however commodities can also be volatile easily affected by natural disasters geopolitics or conflict real estate income may also help buffer against inflation as landlords can increase their rent to keep pace with the rise of prices overall the u s government also offers treasury inflation protected securities tips a type of security indexed to inflation to protect against declines in purchasing power types of price indexesdepending upon the selected set of goods and services used multiple types of baskets of goods are calculated and tracked as price indexes the most commonly used price indexes are the consumer price index cpi and the wholesale price index wpi the cpi is a measure that examines the weighted average of prices of a basket of goods and services that are of primary consumer needs they include transportation food and medical care cpi is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket the prices in consideration are the retail prices of each item as available for purchase by the individual citizens cpi can impact the value of one currency in relation to those of other nations changes in the cpi are used to assess price changes associated with the cost of living making it one of the most frequently used statistics for identifying periods of inflation or deflation in the u s the bureau of labor statistics bls reports the cpi on a monthly basis and has calculated it as far back as 1913 the cpi u which was introduced in 1978 represents the buying habits of approximately 88 of the non institutional population of the united states the wpi is another popular measure of inflation it measures and tracks the changes in the price of goods in the stages before the retail level while wpi items vary from one country to another they mostly include items at the producer or wholesale level for example it includes cotton prices for raw cotton cotton yarn cotton gray goods and cotton clothing although many countries and organizations use wpi many other countries including the u s use a similar variant called the producer price index ppi the ppi is a family of indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time the ppi measures price changes from the perspective of the seller and differs from the cpi which measures price changes from the perspective of the buyer in all variants the rise in the price of one component say oil may cancel out the price decline in another say wheat to a certain extent overall each index represents the average weighted price change for the given constituents which may apply at the overall economy sector or commodity level the formula for measuring inflationthe above mentioned variants of price indexes can be used to calculate the value of inflation between two particular months or years while a lot of ready made inflation calculators are already available on various financial portals and websites it is always better to be aware of the underlying methodology to ensure accuracy with a clear understanding of the calculations mathematically say you wish to know how the purchasing power of 10 000 changed between january 1975 and january 2024 one can find price index data on various portals in a tabular form from that table pick up the corresponding cpi figures for the given two months for september 1975 it was 52 1 initial cpi value and for january 2024 it was 308 417 final cpi value plugging in the formula yields since you wish to know how much 10 000 from january 1975 would be worth in january 2024 multiply the inflation rate by the amount to get the changed dollar value this means that 10 000 in january 1975 will be worth 59 197 today essentially if you purchased a basket of goods and services as included in the cpi definition worth 10 000 in 1975 the same basket would cost you 59 197 in january 2024 advantages and disadvantages of inflationinflation can be construed as either a good or a bad thing depending upon which side one takes and how rapidly the change occurs individuals with tangible assets like property or stocked commodities priced in their home currency may like to see some inflation as that raises the price of their assets which they can sell at a higher rate inflation often leads to speculation by businesses in risky projects and by individuals who invest in company stocks because they expect better returns than inflation an optimum level of inflation is often promoted to encourage spending to a certain extent instead of saving if the purchasing power of money falls over time there may be a greater incentive to spend now instead of saving and spending later it may increase spending which may boost economic activities in a country a balanced approach is thought to keep the inflation value in an optimum and desirable range buyers of such assets may not be happy with inflation as they will be required to shell out more money people who hold assets valued in their home currency such as cash or bonds may not like inflation as it erodes the real value of their holdings as such investors looking to protect their portfolios from inflation should consider inflation hedged asset classes such as gold commodities and real estate investment trusts reits inflation indexed bonds are another popular option for investors to profit from inflation high and variable rates of inflation can impose major costs on an economy businesses workers and consumers must all account for the effects of generally rising prices in their buying selling and planning decisions this introduces an additional source of uncertainty into the economy because they may guess wrong about the rate of future inflation time and resources expended on researching estimating and adjusting economic behavior are expected to rise to the general level of prices that s opposed to real economic fundamentals which inevitably represent a cost to the economy as a whole even a low stable and easily predictable rate of inflation which some consider otherwise optimal may lead to serious problems in the economy that s because of how where and when the new money enters the economy whenever new money and credit enter the economy it is always in the hands of specific individuals or business firms the process of price level adjustments to the new money supply proceeds as they then spend the new money and it circulates from hand to hand and account to account through the economy inflation does drive up some prices first and drives up other prices later this sequential change in purchasing power and prices known as the cantillon effect means that the process of inflation not only increases the general price level over time but it also distorts relative prices wages and rates of return along the way economists in general understand that distortions of relative prices away from their economic equilibrium are not good for the economy and austrian economists even believe this process to be a major driver of cycles of recession in the economy leads to higher resale value of assetsoptimum levels of inflation encourage spendingbuyers have to pay more for products and servicesimpose higher prices on the economydrives some prices up first and others later