How inflation is making you poor and what you can do about it

What is inflation?

Inflation is a sustained, rapid increase in prices, as measured by for example the Consumer Price Index over years, and mirrored in the correspondingly decreasing purchasing power of the currency.

It has its worst effect on the fixed-wage earners, and it is definitely discouraging for you to save.

As a result of inflation, the purchasing power of a unit of currency falls. For example, if the inflation rate is 2%, then a chocolate bar that costs $1 in a given year will cost $1.02 the next year. As goods and services require more money to purchase, the implicit value of that money falls.

Types of inflation

Modern economic theory describes three types of inflation:

(1) Cost-push inflation

Is due to wage increases that cause businesses to raise prices to cover higher labor costs, which leads to demand for still higher wages (the wage-price spiral),

(2) Demand-pull inflation

Results from increasing consumer demand financed by easier availability of credit.

(3) Monetary inflation

It is caused by the expansion in money supply. When the central banks start printing more money to cover its deficits.

For example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and especially silver flowed into the Spanish and other European economies. Since the money supply had rapidly increased, prices spiked and the value of money fell, contributing to economic collapse.

How to beat inflation

Your money need to grow by at least the rate of inflation to keep up with the rising prices.

The last recorded inflation rate in the US was at 3.9% in September, 2011. With that in mind , we need to make at least 4% in order to beat inflation.

Check out the following tips in how to do it.

Dividend paying stocks

The stock market is a place where you can beat the inflation. You can invest in dividend paying stocks which will give you a return to beat the rising prices. For that you to look at dividend yields of stocks. This is the percentage of the stock price you will get as a dividend payment.

Gold

Gold is considered one of the safest investments in the world. It is also an investment that has historically beaten out inflation. For example, in the last 50 years, gold has increased by an average of 9.99% every year, but inflation has averaged 4.05% a year.

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