Inflation

What is inflation and why is important for you to be aware of it?

What Is Inflation?

Inflation is the continuous decrease in intrinsic value of a currency which leads to an increased cost in products and services.

Nonetheless, a little of inflation can be healthy (around 2% per year) because it can help create jobs and businesses.

You may have noticed that year after year, simple shopping such as groceries are gradually getting more expensive.

This reduction of purchasing power leads to a weaker economic growth.

There are also some deflationary periods in time, depending on a lot of factors. Let’s dig in some of them.

How Inflation Or Deflation Happens

Even though the global economy is somewhat interconnected to a certain degree, particular regions have a central bank which control the currency and monetary system in place.

For instance, in the United States, there’s the Federal Reserve System (also known as FED) whereas in Europe there’s the European Central Bank.

These central banks have the role of 'printing' more money and lending it to institutions. These then lend the borrowed money to people or other companies.

The rates at which these loans are given can be a good indicator of the state of the economy (see the economic calendar for more information on this).

The more money is created 'out of thin air', the bigger the inflation will be.

Why Should You Care About Inflation

Imagine you work and have received a raise of about 5% of your total salary.

Now also imagine that the inflation for that particular time was 7%.

This means that what appeared to be a nice raise, is in fact a decrease of 2% in your monthly salary.

A lot of people don't know or ignore this fact, while in reality they should be fighting for at least not having their wages reduced.

The same logic applies to products and services. Whereas before you paid 50 cents for a coffee, today you pay 3 dollars.

Conclusion

Either the central banks keep a low rate of inflation per year, avoiding a snowball of raise in prices, or big crashes can happen.

It's true that in times of crisis, the interest rates usually rise in order to balance the economy, but isn't it better if we can balance things out, without needing to reach that boiling point?

I invest in cryptocurrencies and ETFs in order to hedge the inflation in the long-term.

There are also other forms of hedging against inflation though by owning assets such as gold, commodities and real state investments.

I'd like to know your strategies as well in the comment section down below.