Inflation- its Effect on Your Investment


Inflation in layman’s term is the rise in money volume compared to the accessible goods and services. As a result of inflation, there is a consistent hike in prices of goods and services and that is why with the same amount of money, you cannot buy the goods and avail the services like in the past.
Inflation has a massive impact on your investments. Regardless of an astronomical sum you are saving now, in future, owing to inflation, you can buy fewer goods. Your purchasing power reduces due to inflation. With higher inflation, the cost of living also increases. If we see the big picture, inflation has affected certain division of the economy which were worst hit with continual surges in price rise. Medical costs and education are two crucial segments where inflation has hit immensely.
The effect of inflation needs to be factored in when we plan for our future investments, especially for retirement. A vision of a decent lifestyle post retirement is essential. And this lifestyle would largely depend on the amount of money saved and amassed for the same. It is also necessary to watch your funds as you retire and how judiciously you save them. Sometimes, the inflation rates could go low, however, that does not guarantee that inflation would never come back to be a bother.
Inflation also has an effect on your investments. With the inflation rising, the interest rates also shoot up. This results in lower stock prices. If a consumer knows that a certain item might cost more in the future, they put a reduced value for the item and later, the prices of those financial assets go south.
To counter the inflation strike, you can take your own action with careful consideration of the market conditions. Few steps can be taken to be well armed against inflation.

  • Most importantly, sometimes the inflation cycle is bound to be long term and hence, it would be wise to be thoughtful of the long term rate of inflation. A vigil in the rates would keep you well posted on inflation.  In case monthly inflation rates hover between 4-5 percent for some time, be assured that the forthcoming days would only make the rise worse.
  • Whenever you invest, ensure you consider the inflation factor, mainly if there are fixed income investments. Go for short bonds and bond mutual funds when the interest rate is low. It might imply that you get a lower return, but so be it.
  • Get to know realistically that inflation might hamper your financial planning. The cost of living might not always increase at a steady rate of 2-3 percent even after your retirement. Inflation rate is here to ascend in the coming years with the enormous rise in certain segments.

As a parting note, let me say that inflation is one truth of life we cannot get rid of. It is beyond control and unforeseeable. What you can do is be wary of the inflation trend, be very judicious regarding your financial planning and know how to save your assets in case of high inflation rate.
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