Protect yourself from inflation


Inflation is the process of a currency losing value relative to products and services within the economy. This causes the price of those products and services to increase resulting in a reduction in buying power relative to those products and services.

 There are two primary sorts of inflation and in order to protect yourself from them it is important to know which is which. The major causes of inflation are a change in the real value of goods or services or an oversupply of money.  Large or sustained levels of inflation are primarily caused by an oversupply of money resulting in a reduction in the value of cash relative to goods and services. Monetary inflation is controlled by monetary policy of the central bank of the currency and to a lesser extent by the private banks within that currency area(through loans which are inflationary). Central banks usually have a policy of trying to maintain a low but positive rate of inflation in order to encourage people to invest there money rather than hoarding it.

 The second cause of inflation is an in the real value of goods or services however this is usually offset by a decrease in prices elsewhere unless there is monetary inflation present in the system or there is an increase in the value of imports relative to exports. This can be the result in drops in the relative price of the currency compared to another currency.

 As an example the United Kingdom has recently experienced a period of high inflation due to monetary policy(in the form of quantitative easing) increasing money supply, at the same time as devaluing pound sterling relative to other currencies. This situation is worsened further by the increasing cost of energy and in particular oil which causes price inflation by increasing the cost of the petrol/diesel necessary to transport products to the shops, forcing retailers to increase prices.


 So now that you know the reasons for inflation how can you protect yourself?


In order to protect yourself from high levels of inflation there are several things you can do. The first is to put your money into a high interest saving account. No matter the cause of inflation it is usually possibly to find a bank account that will at the very least keep pace with inflation and possibly beat it resulting in an overall increase in purchasing power. In the event that a savings account with a good interest rate is not available another option is to invest in something which is unlikely to be effected by inflation or even better to purchase something that is likely to increase in real value during the inflationary period.

 Gold is known to hold its value despite inflation and because of this is often the place to invest when high inflation is expected, if inflation is caused by increasing fuel prices then investing in oil as a commodity is a good idea as well. Investing in shares can be a good idea if the companies you are investing are likely to be unaffected by the inflation rate. Either way before or during high levels of inflation it is always a good idea to invest in something that isn’t losing value like your money is. The average member of the public does little to reduce the effects of inflation on there purchasing power so it can be well worth your time to invest in something else.

Another possible way to avoid the effects of inflation can be to invest in property. Property tends to be very good at holding its value despite monetary inflation, this is often because monetary inflation is driven by mortgages to the housing industry resulting in increases in the price of houses relative to money. However property isn’t a liquid asset and so it tends to be a way to avoid inflation in the long term not to protect the money in your current account.