Inflation is the general increase in prices of goods and services in an economy. In other words, inflation can be described as the reduction of purchasing power over time. This means that $10 in an inflationary environment today (t) will buy you less goods or services in a future period (t+1). This is not always a bad thing. Economies will low and controlled levels of inflation puts pressure on individuals to spend more money today. Furthermore, it also makes entrepreneurial ventures, investments with higher risks and rewards, to seem more attractive.
As of July 13, 2022 inflation in the United States for the past month was at 9.1%, that is 7% greater than the ideal 2% (Rubin, 2022). At this rate, one can look at their savings (money put in a bank or perhaps stored in one’s mattress) as diminishing by the same percentage annually. Does this mean that we need to spend everything we have immediately? What about the future? Is saving pointless? Not quite.
While inflation is currently being dealt with by the Federal Reserve, (hence all the interest hikes over the last few months) it is important for people to know that there are methods to safeguard your wealth from inflation. A few of these inflation hedged securities include Treasury Inflation-Protected Security (TIPS) and floating rate bonds. Another security that is currently garnering a lot of investors attentions is the I-bond (Dagher, 2022). I-Bonds are inflation adjusted bonds sold directly by the US Treasury. Unlike TIPS, where the principle value of the security is inflation-adjusted, I-bonds method of accounting inflation is through changing the interest rate of the coupon payments. Additionally, there is a caveat. An individual is limited to only purchasing $10,000 worth of I-bonds a year.
Other securities that become quite popular in highly inflationary environments include commodities such as gold and for those with excess money, long run stocks. Overall, it is important for every individual to make an assessment of their current financials. This means determining how much they have and how much they will need in the short term (next 2 years or so.) Only after doing that, can you decide the best course of action: whether it is saving, investing or a specific combination of both.
Bibliography
Dagher, V. (2022, May 23). What is an I bond? everything you need to know to earn nearly 10% interest. The Wall Street Journal. Retrieved July 19, 2022, from https://www.wsj.com/articles/what-are-i-bonds-everything-you-need-to-know-to-earn-nearly-10-interest-11650543039?mod=article_inline
Oner, C. (n.d.). Inflation: Prices on the Rise. International Monetary Fund. Retrieved July 19, 2022, from https://www.imf.org/external/pubs/ft/fandd/basics/30-inflation.htm
Pinsker, B. (2022, July 14). Saving vs. investing: How do you decide? The Wall Street Journal. Retrieved July 19, 2022, from https://www.wsj.com/buyside/personal-finance/saving-vs-investing-01657732972?mod=wsj_hp_buyside_pos2
Rubin, G. T. (2022, July 15). U.S. inflation hits new four-decade high of 9.1%. The Wall Street Journal. Retrieved July 19, 2022, from https://www.wsj.com/articles/us-inflation-june-2022-consumer-price-index-11657664129
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