Inflation and why it is important to understand

Let me put it bluntly: inflation is a bitch.

Inflation has been dubbed the enemy of the investor. Namely, it will, in the long run, frost the returns that we sweat hat in the coveted stock market.

Well, does that mean that investing is a pointless thing to do? Should I come up with a new topic to blog about?! No way. On the contrary, inflation is one of the main reasons why investing is important.

What, what?

Okay, ladies, inflation means a weakening of the purchasing power of money, that is, prices rise over time. For example, the money your parents used to buy Saturday candy from a nearby rail in their childhood would make significantly less candy today. With 2% inflation, the purchasing power of money will be halved in 35 years.

And that’s the whole idea of inflation: you get more with the same money today than tomorrow. (Or well, at least more than next year, and especially in 10 years) This is at war with the principles of the saver: save first, then buy. So why on earth does inflation even exist?

Why oh why

Inflation is due to an increase in the supply of money (ie it is more available in the economy). Because of inflation, not all the world’s problems can be solved simply by printing more money. (This my father explained to me when I thought, as an eight-year-old child genius, that I had come up with a way to improve the world.) Monetary politicians aim for 2% annual inflation to get people to keep their shopping pants on their feet and with them in the national economy.

Besides, the opposite of inflation, or deflation, is no better. Deflation is a much rarer phenomenon than inflation, leading to lower prices and stronger purchasing power of money. Although deflation favors us, savers and investors, it is generally seen as a bad thing, as it is associated with lower consumption, falling wages, and unemployment. (That is, to the fact that people generally have less hail.)

To the stock market but

Inflation is, in theory, a good thing for the debtor, as he gets to buy something with borrowed money today that would be more expensive to buy next year. In practice, however, interest rates and wages take account of inflation, with the result that that benefit is reduced and even lost.

Inflation is treated most badly by a saver who sleeps his money in a bank account (or worse, in a mattress). Rule of thumb: if your savings account interest rate is below 2%, you know that money will deteriorate slowly but surely.

So where is it worth keeping that money so that inflation wouldn’t eat it as a dessert? (This was a rhetorical question: on the stock exchange, of course) Of course, inflation must also be taken into account on the stock exchange: even if the average annual return is 8%, after inflation it is only 6%. Or, if you think more positively, it’s still 6%.

And positivity is always worth it.

Alrighty, it had everything from this lot! Give yourself a high five if you learn something new today!

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