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Inflation

 

Inflation is a percent that reflects a price increase of goods and services portfolio. When inflation occurs, money is losing its purchasing power. For example, if inflation would keep at 8% for 9 years (it would make 100% compounded) then after those nine years you could buy only the half of goods that you could bought before this inflation. 

 

When inflation is extremely high it is called hyperinflation. If inflation is negative, it is called deflation and it different than stagflation. There are several indexes used to measure inflation. The most popular is consumer price index (CPI). And you should remember, that every currency has different inflation rate and if you are investing internationally you should pay attention to that. Normal inflation for developed countries is 1%-3%, but emerging countries have higher inflation, which usually is between 2% and 7% or for problematic economies even higher. 

 

Inflation is very important for both: economy and investment. If investor does not beat the inflation that means his real return on investment is negative. Especially inflation is dangerous for long term fixed income investments, as long term bonds. Stocks and real estate investments are not so sensitive for inflation, because over longer term their prices adjust according to inflation rate. But if you are keeping your money in bank’s deposit at rate lower than inflation (that happens quite often in reality), it means that you are losing your money by little. 

 

If you are investing and expect a jump in inflation, you should avoid long term fixed income investments or lok for inflation linked bonds.

 






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