Understanding Inflation and How It Impacts Your Investments

Investors across the globe are concerned about inflation due to fluctuating markets and continuing political unrest both at home and abroad. At a time like this, it is critical that investors understand how inflation impacts the economy and their assets.

Inflation takes place in every country, not just those countries experiencing political dissension, market challenges, poverty, and crime. Developed markets are not exempt from currency risks that lead to economic downturns.

As you know, inflation is a sustained (inflated) price increase that leads to a fall in the purchasing power of the dollar, this is generally due to excess demand and supply issues, and may trigger other economic or market events.

Inflation is primarily measured by the consumer price index (CPI), which is based on the rate that prices increase for household goods and services consumed. The CPI omits specific non-applicable spending for items like energy prices that are impacted by factors outside consumer control; those that do not directly impact inflation.

When inflation rises—consumers may purchase fewer goods, prices may go up, and profits may go down. As a result, the economy slows down and becomes less stable than average. There is no question; inflation has a concerning impact on your investments.

Inflationary Impact on Bonds

When it comes to investment bonds prices, inflation generally has the most impact. Heightened increase generates higher yields, which in turn leads to lower bond prices. Then inflation negatively impacts the value at maturity or the principal payment.

The impact on bonds is visible in nominal versus real returns. For example, nominal returns are “actual” yields. Real returns, on the other hand, represent inflation-adjusted yields that are paid to lenders by borrowers. As inflation compounds with time, these sums add up and adversely impact investors.

International investors are concerned about sovereign debt—the money or credit owned by a government to its creditors, according to Justin Kuepper, the author at the balance. Inflation, in this case, impacts not only bonds but also securities and bills with short-duration maturity dates. Sovereign debts may also include long-duration contracts such as pensions, services, entitlement programs, and more.

Inflationary Impact on Stocks

When interest rates hike, and companies raise their prices, investors become concerned about their financial portfolios. Stocks are generally a good hedge against inflation since company revenues can show growth at the same rate as inflation. However, investors may overpay for stocks. If companies raise prices during a boom, global sellers find it difficult to remain competitive since foreign producing companies may not need to raise their rates. Inflation means most are paying more and receiving less. Financials are overstated due to inflation.

Some economists believe that inflation of 1-3% offers a substantial return in stocks, and others believe inflation of 6% or more produces negative returns for stocks. In any case, it is difficult to determine real cause and effect analysis. Most agree that out-of-control inflation results in a lower return on equities.

What Happens When Inflationary Prices Go Back Down?

When prices go back down after inflation so do the inflated revenues, making it difficult to assess value, the primary tool by the Federal Reserve for fighting inflation is to apply short-term interest rates.  If money costs more to borrow, the Federal Reserve can remove some excess capital from the market and thus slow the price increase cycle. The goal is to reach lower, controlled inflation in which employment can increase, consumers have more to spend, and the economy grows. In most scenarios, this approach is not always easy to assess or to achieve.

Hedge Your Financial Portfolio With Precious Metals

There are many ways in which investors prepare for inflation. It is critical to reducing risks, and one of the most attractive ways to hedge your financial portfolio is with substantial assets such as precious metals. By investing in non-inflationary security such as gold or silver, investors weather the storm of economic downturns. Gold bullion, a gold-backed individual retirement account (IRA) or silver are some of the most sought-after securities in a market such as the one the US and national economies are facing.

The question is, should investors be concerned about today’s inflationary threats when it comes to their investments? A diversified financial portfolio is one that is planned to withstand uncertain times in which inflation is imminent. Gold and silver monetary assets are the answers.

Keep in mind; inflation destroys purchasing power. Whether your financial future is well balanced or you are a retiree on a fixed income, you need secure assets to withstand whatever the market bears. With a diversified portfolio that includes stocks, bonds, and tangible precious metals to hedge against inflation, you take a step in protecting your assets and those of your family for the future.

Cash assets are always recommended, but inflation works against this type of fiat money. Consider that an item valued at a specific dollar amount will be worth less after a period of inflation. A purchase in gold or silver is a substantial addition to any portfolio and one that is stable and free from government regulations. Hedge yourself from inflation now by purchasing protected security in precious metals. Invest in gold or silver today. You may not want to wait until another round of recession.

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