The value of the dollar will never drop as low as what some people are willing to do to get it.
And economists know they don’t have to be fair to get you to spend it.
If closing the country last year was the equivalent of dropping an atom bomb on the economy, we are undoubtedly experiencing the initial stages of the fallout.
As we slowly rise out of the ashes of our crippled economy, the ghost towns of 2020 are coming back to life and the unemployment rate has been cut in half since this time last year.
While it may feel comforting to see products steadily finding their way back onto the store shelves that survived the shutdown, you may notice that you’re not paying the same price you expected.
This is the first symptom experienced from the fallout: inflation.
And learning how to protect yourself against this inflation radiation is essential to prevent your finances from being affected by it.
Obviously, inflation is not a form of radiation in any way.
Inflation radiation is just some wordplay that has a ring to it.
If you compare the two you will find some similarities.
Popular opinion says Market inflation and nuclear radiation are bad for the economy.
They both have life-changing consequences when directly exposed too to large of an amount.
The effects of inflation and nuclear radiation remain in the area for lengthy, prolonged, periods of time.
Both are natural elements of their own accord, and if not handled responsibly can destroy anything in its path.
But, radiation levels gradually decrease.
Whereas, inflation will always continue to rise.
So with the radiation metaphor being put to rest, let’s answer a few questions.
Inflation is the decline of purchasing power of a given currency over time.
A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time.
It is the power of the almighty dollar depending on the value of a good or service and the cost required to offer or produce it.
There is a common misunderstanding with inflation, and people often resort to asking “why is inflation bad?”
People tend to associate higher costs as negative, feeling as if inflation is ruining the economy.
“Back in my day, this thing used to cost a nickel! This country is going down the drain!”
We’ve come a long way since then and for justified reasons. Inflation is not particularly good or bad in its nature.
If could be classified on an alignment chart as a necessary evil at its worst, chaotic good at its best.
It wasn’t created to destroy a market or cause suffering, but to maintain an equilibrium between spending and purchasing power, collateral debt, supply, and demand, etc.
It is simply a tool designed to measure and predict the economic value of all goods and services based on availability and events.
Plus, inflation actually reduces the real value of the national debt. If the price for something goes up, it can mean different things.
Either supply is low, taxation is recovering, a company just decides to be greedy, or a variety of other reasons.
The process that decides when market inflation is imposed and to what extent is extraordinarily complex.
And different types of inflation apply to different characters acting in the market.
There are two overall categories of inflation.
One category contains types of inflation that impact the consumer directly, based on supply and demand.
The other types of inflation stem from factors that affect the costs required in the manufacturer’s production process.
This is the simplest form of inflation.
The price level rises continuously and is visible to everyone at any time.
You can see the annual rate of increase in the price level.
Let’s say that there is excess demand in an economy.
Typically, this leads to an increase in price.
However, Repressed Inflation prevents manufacturers and retailers from increasing the prices to outrageous amounts.
The government can impose repressive measures i.e. price control, rationing, etc. preventing the market from exploiting customers because of the increased demand.
In this case, the price level increases very slowly over an extended period of time. Even a fraction of a penny adds up over time. Slow and steady wins the race.
In this case, the rise in the price level is neither too fast nor too slow – it is moderate. This porridge is just right.
This occurs when there are no external factors that call for raising prices.
Prices are raised based on the decision of the supplier.
This takes place after the full employment of all the factor inputs of an economy.
When there is full employment, the national output becomes perfectly inelastic.
There is no expressed cause for the economy to compensate or expend the market value output of manufacturing supply or consumer demand.
Therefore, more money in more people’s pockets simply implies higher prices and not more output.
External factors may pressure the need for inflation due to bottlenecks in certain sectors of the economy.
If trading and collecting raw materials come under complications, or a crisis prevents the distribution of products to store shelves, the economy will impose precautionary measures to prevent mass shortages and hyperinflation.
In fact, a shipping crisis on the west coast is responsible for mass shortages across the nation and one of the many reasons why the fallout of closing down the country will be felt for years to come.
In hyperinflation, the price level increases at a rapid rate.
In fact, you can expect prices to increase every hour.
Usually, this leads to the demonetization of an economy.
This rarely happens in modern times. In smaller markets, this is similar to the illegal act of price gouging.
For example, take last year when N95 Medical Masks were in such high demand, the government stepped in and stripped their value in order to force markets to forfeit and return them.
Those who tried to exploit the urgent demand from panicking people sold them for astronomical prices.
Gotta shut it down when things start popping off.
(To Much Supply, Decrease Prices to Increase Demand)
This is when the aggregate demand in an economy exceeds the aggregate supply.
This increase in the aggregate demand might occur due to an increase in the money supply or income or the level of public expenditure.
The aggregate demand and supply are calculated by: multiplying and dividing the equilibriums of the average maximum price a customer is willing to pay and cost of operation output, by the overall cost of producing the product and the minimum price a customer is willing to spend.
Averaged by a marginal line of public demand.
Essentially, if what has been produced costs more than the public is willing to pay, the price will go down and so will production expenses to pull demand.
When demand for the product goes up, so does the price and production to meet the quantity demanded.
They pull the market’s demand towards them.
(Not Enough Supply, Prices Increase to Lower Demand)
Supply can also cause inflationary pressure. If the aggregate demand remains unchanged but the aggregate supply falls, then the price level increases.
The process of calculating Cost-Pull Inflation is similar to Demand Pull.
However, instead of dropping the price to inspire demand, the price increases to slow down demand so production expenses do not have to increase.
Or if there are insufficient supplies to meet demand, prices are raised to gently pump the brakes on public demand until there is enough supply to satisfy the new equilibrium price and output levels.
They push the market away with increased costs.
Just by identifying the different types of inflation, you can probably figure out that it’s actually a pretty common occurrence in commerce.
The economy is constantly in a state of fluctuation due to current events, innovation, hoarding, raw material resourcing, and so on.
The margin of inflation depends on a variety of external and internal factors to our national economy.
When demand for a commodity exceeds its rate of supply, then the excess demand pushes the price up.
On the other hand, when the factor prices increase, the cost of production rises too.
This leads to an increase in the price level as well.
If a civil dispute or war breaks out between countries that are the main suppliers of raw materials or occupy trade routes of critical assets, then the price for anything depending on those resources will increase as a result.
If a shipping container crisis on the west coast sealine is causing a massive stockpile of supplies from being distributed, which in turn causes decreased factory production and in-store shortages, then prices will increase from cost-push inflation.
Along with government spending, public spending is an important element of total spending.
The total amount is calculated to determine the aggregate demand.
It measures and adjusts the price for all finished goods and services to meet demand at any given time.
Usually, in lesser developed economies, the Govt. spending increases inflationary pressure on the economy.
There are times when the Government spends more than it can afford.
Rather than increasing our national debt, or driving taxes through the roof, it will temporarily decrease the value of the dollar by increasing its deficit spending.
They print more money to spend for an allotted period that eventually leads to economic recovery.
Therefore, in order to afford the extra spending, the Government resorts to deficit financing.
When people have money to spend, they like to spend it. When they spend it, the economy gets a boost.
And if you have a lot of people all spending a lot of money all at once, we enter a “boom period."
With so much money rapidly circulating around the economy, businesses see increased revenue, manufacturers increase production, and everyone’s profited in one way or another.
Once the period ends, prices are raised and demand is decreased to allow a period to resupply and produce.
When a location’s population grows so does the demand for commerce in the area and the number of potential buyers who consume a commodity.
As the population increases, supply must increase to meet the growing demand.
Prices are inflated on the most appealing or essential items due to the variable customer spending limits.
And, until the individual consumer demand is surpassed by collective market demand, the prices stay up.
Hoarding occurs when people expect a shortage, they anticipate inflation, or they want to resell a commodity for an upcharge due to spiking demand.
But, more often people who panic buy in bulk do not put them back into market circulation.
Despite manufacturers producing enough quantity to supply the general public, the mass purchase and hoarding of supplies create an artificial shortage.
Companies supplying the product or services are met with unexpected swings in supply and demand.
Their operations are unable to ship and provide what is needed by the unpredictable demand.
So prices are raised to reduce the rate of purchasing.
Mass panic-buying leads to shortages and drives more hoarding of the product and this is what causes inflation in times of emergency.
If the cost to trade and transport raw goods and materials across the world increases, then so must the price of production and selling to compensate.
The international market swings in favor of not just the largest companies, but the smaller countries’ ability to provide and distribute essential resources as well.
When a company is met with increased taxes or spending on variable costs to maintain production, they inflate their own company prices to make the consumers compensate for their financial losses.
Don’t be intimidated if you see inflation occurring on the items you are used to purchasing.
If you would like to protect yourself against inflation, there are a variety of investments and financial asset opportunities to guarantee the price you pay now will lead to a much high return in the future.
You’ll let the value of your current investment increase along with the prices of inflation.
The roof over your head should always be worth more than on the day you bought it.
The value of a home has increased significantly in the past 30 years.
Your home’s worth at the time of purchase will increase with the economy’s rate of inflation, leading to you receiving a much higher return on your investment on the day you decide to sell it.
This also applies to investing in rental properties.
The biggest bonus with owning rental properties is the revenue you collect from the tenets residing in the property you paid a flat rate for.
As rent increases and inflation raises property value, you’ll eventually walk away with three profitable actions after selling.
Real Estate Investment Trusts are investment funds that tie directly into real estate values and rents and protect you.
Commodities are physical items with inherent value.
People want and need them in the course of everyday life, maintaining a constant state of demand value.
The price of the items is adjusted to supply and demand and can be sold anywhere the demand is needed.
When the dollar loses value, the prices of these staple items typically rise to compensate.
Gold, lumbar, precious metals, grain, sugar, etc. are all commodities that people fall back on when they need to sell to meet demand.
Believe it or not, high-grade art and fabric command higher pricing values in times of lower dollar value.
Investing does not always need to pertain to finances, you can also invest in the future to guarantee yourself a sense of safety.
They provide a substantial backup alternative in moments when emergencies send the prices soaring to the skies and supplies are scarce.
The price you will pay for those items will increase with inflation.
But the amount you paid to stockpile yourself to prepare for the future will remain the same.
The good news is, the individual value of each of those resources will increase as resources become scarce and the unprepared people’s demand goes up.
The Treasury Department issues a special type of bond specifically designed to protect against inflation.
Treasury inflation-protected securities, or TIPS, adjust in value directly based on economic inflation.
Similar to regular bonds, they pay a fixed interest rate, and you can buy and sell them on the open market.
However, unlike regular bonds, the reselling amount changes to reflect inflation.
These stocks gain their appeal by adjusting to the price gains marked up by inflation rather than the stocks oriented on income to pay high dividends.
When companies hike their prices to compensate for inflation, benefits from their profits are often seen to be passed down to holders of these stocks.
If you were confused when I mentioned that Inflation Reduces the real value of the national debt, this is a good example as to why.
During periods of rampant inflation, interest raises are in order to slow it, which in turn also helps keep the banking system afloat.
If interest rates don’t exceed inflation, lenders lose money.
If you have an adjustable interest rate, you can expect it to rise if hyperinflation strikes.
If you transfer your variable interest rates to fixed interest rates, they remain unaffected when mass inflation occurs.
Because the value of each debt payment shrinks along with the dollar you wind up paying less because your total debt’s rate does not increase.
Slowly but surely, America’s economy is recovering from the nationwide shutdown that impacted so many souls and businesses last year.
As new commerce fills our cities, the store shelves that were left barren for so long are finally being filled with products again.
But, even though your local market’s appearance may be returning to something you’re familiar with, you can be sure to anticipate the prices to look much different.
As I mentioned previously, it’s a natural occurrence to balance the overall market value with supply and demand.
But, now you’re a little sharper with the different types of inflation and gained some protective measures against them.
By investing wisely and watching the market you can anticipate the next price hike and prepare yourself while everyone else stands around wondering what they did wrong.