How To Make Money In Inflationary Times – FARMINGTON HILLS, Mich. () – We see it everywhere: at the grocery store, at the gas pump, and at the car dealership.
“Everybody’s feeling hurt right now with all these consumer prices that have skyrocketed, right, everybody’s feeling it,” said. Jennifer Bloom of Bloom Advisors.
How To Make Money In Inflationary Times
The annual inflation rate is now 7%, the highest since 1982, according to Labor Department statistics.
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We turned to Jennifer Bloom of Bloom Advisors for a game plan for our money in times of inflation.
“I think people need to get their costs first,” Bloom said. “The best thing consumers can do in times like this is to control what they spend and what goes out.”
Next, be proactive, especially if you have cash savings. Shop for the best prices for the money, says Jennifer.
“If you have debt, high-interest debt or credit card debt, now is the time to start thinking about paying it off because the Fed has signaled interest rate hikes. The first people to be hit are consumers,” Bloom explained.
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If debt isn’t an issue and you want to make money with your money risk-free, Jennifer recommends I-bonds.
“It’s an attractive offer. At 7.12% until April 2022, which is probably as good as it gets, that’s a pretty good rate,” Bloom said.
There are conditions. You can only spend $10,000 per person. Bonds must be kept for at least one year. If you see before the 5-year deadline, there is a 3-month interest penalty. The rate is variable and is adjusted twice a year.
“For some it might be a great product, but for others it’s better to pay off debt,” Bloom said.
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If you own a home and haven’t yet refinanced your mortgage with low interest rates, Jennifer says this is another must-do.
“Number three is reviewing your investments,” Bloom said. “We believe in a well-diversified portfolio, and well-diversified portfolios can protect against inflation with enough flexibility.”
Number Four: “Keep calm, be smart, fear and greed are the two most common dangerous emotions for investors. You really want to be careful before you make any rash decisions,” Bloom said. Inflation measures the rise in prices of goods and services in the economy. When inflation occurs, leading to an increase in the price of basic goods such as food, it can have a negative impact on society.
Inflation can occur for almost any product or service, including needs-based expenses such as housing, food, medical care, and utilities, as well as necessities such as cosmetics, cars, and jewelry. When inflation becomes prevalent throughout the economy, the expectation of continued inflation becomes an overriding concern in the minds of both consumers and businesses.
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Central banks in advanced economies, including the US Federal Reserve, monitor inflation. The Federal Reserve sets an inflation target of around 2% and adjusts monetary policy to fight inflation if prices rise too much or too quickly.
Inflation can be a concern because it makes money saved today less valuable tomorrow. Inflation erodes consumer purchasing power and can even interfere with retirement. For example, if an investor earned 5% on investments in stocks and bonds, but the inflation rate was 3%, the investor actually earned only 2%. In this article, we will explore the main drivers of inflation, the different types of inflation and who benefits from it.
There are several factors that can drive prices or inflation in an economy. Inflation usually results from an increase in production costs or an increase in demand for products and services.
Cost inflation occurs when prices rise due to increases in production costs such as raw materials and wages. The demand for goods is constant, while the supply of goods decreases due to the increase in production costs. As a result, additional production costs are passed on to consumers in the form of higher prices for finished products.
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One sign of potential cost inflation is rising commodity prices, such as oil and metals, as they are key production inputs. For example, if the price of copper rises, companies that use copper to make their products may raise the prices of their goods. If the demand for the product is independent of the demand for copper, the company will pass on the higher raw material costs to the consumers. The result is higher prices for consumers without any change in the demand for the products being consumed.
Wages also affect the cost of production and are usually the biggest expense for companies. If the economy is doing well and the unemployment rate is low, there may be a shortage of labor or workers. In turn, companies raise wages to attract qualified candidates, which causes the company’s production costs to rise. Cost-plus inflation occurs when a company raises prices due to employee wage increases.
Natural disasters can also increase prices. For example, if a hurricane destroys a crop such as corn, prices may rise throughout the economy because corn is used in many products.
Demand-pull inflation can be caused by high consumer demand for a product or service. When demand for many goods in an economy increases, their prices tend to rise. Although it is not often a concern for a short-term imbalance between supply and demand, persistent demand can reverberate through the economy and raise the cost of other goods; the result is demand-pull inflation.
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Consumer confidence tends to be high when unemployment is low and wages are rising, leading to more spending. Economic growth has a direct impact on the level of consumer spending in the economy, which can lead to high demand for products and services.
When the demand for a particular good or service increases, the available supply decreases. When fewer goods are available, consumers are willing to pay more to purchase the goods – as described in the economic principle of supply and demand. The result is higher prices due to increased demand.
Businesses also play a role in inflation, especially if they produce popular products. A company can raise prices simply because consumers are willing to pay the increased amount. Companies are free to raise prices even when the goods being sold are something that consumers need for everyday life, such as oil and gas. However, it is consumer demand that gives companies the leverage to raise prices.
Built-in inflation occurs when enough people expect inflation to continue in the future. As the price of goods and services increases, people may believe that the same rate of increase will continue in the future. Because of these shared expectations, workers may demand higher wages to forestall price increases and maintain their standard of living. Rising wages would lead to higher costs for businesses, which could pass those costs on to consumers. Higher wages also increase the disposable income of consumers, increasing the demand for goods, which can push prices even higher. A wage-price spiral can then be established, as one factor feeds back into another and vice versa.
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For example, the housing market has seen its ups and downs over the years. If homes are in demand because the economy is growing, home prices will rise. The demand also affects auxiliary products and services that support the housing economy. Building products such as lumber and steel, as well as nails and rivets used in homes, could all see an increase in demand due to higher demand for homes.
Expansionary fiscal policies by governments can increase the discretionary income of both firms and consumers. When the government cuts taxes, businesses can spend it on capital improvements, employee benefits, or hiring new employees. Consumers may also buy more goods. The government could also stimulate the economy by increasing spending on infrastructure projects. The result can be an increase in demand for goods and services, leading to an increase in prices.
Just as expansionary fiscal policy can spur inflation, monetary policy can also become loose. Expansionary monetary policy by central banks can lower interest rates. Central banks like the Federal Reserve can lower the cost of borrowing for banks, which allows banks to lend more money to businesses and consumers. An increase in the amount of money available throughout the economy leads to greater spending and demand for goods and services.
Monetarists understand that inflation is caused by too many dollars and too few goods. In other words, the money supply has grown too large. According to this theory, the value of money is subject to the law of supply and demand, just like any other commodity in the market. As the supply increases, the value decreases. When the value of money falls, its purchasing power falls and things become relatively more expensive.
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This quantity theory of money (QTM) can be summarized in the equation of exchange, which states that the money supply multiplied by the rate at which money is spent per year (the velocity of money) equals nominal spending in the economy:
. P (prices) may therefore rise
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