Inflation Can Worsen Financial Difficulty, But It Also Presents Opportunity

• Author: Michael Bordonada
• Posted: 2024-08-04

Significant amounts of government spending in response to the coronavirus pandemic has resulted in a surge in inflation. These high inflation levels have caused many everyday items to become more expensive month after month, while wages haven't necessarily increased, leading to greater financial pressure on many individuals and families.

While inflation has undoubtedly made people's lives more difficult, it also has presented many opportunities for financial growth.

How Exactly Does Inflation Work?

Inflation is when there is a surplus of currency in an economy that largely outpaces the collective amount of goods in society for purchase. As there aren't enough things available to buy, the price of most items goes up and they become more valuable because of scarcity.

In practical terms, this means that most consumer goods purchased online or in stores will require more currency to purchase, regardless of whether people gain additional access to money. This can dramatically limit the affordability of basic necessities and push already struggling people to the brink. However, inflation also has the potential to improve financial health in several ways.

How Can Inflation Help Your Finances?

Inflation is problematic because it makes currency, the primary medium by which people purchase things, less valuable. While currency is useful in its own right, it's not the only store of value and certain investments are almost completely inflation proof.

When considering where you should focus your finances, its best to look into things that aren't inherently tied to inflation or even benefit from it.

While there are a plethora of options at your disposal, there are three that really stand out:

Treasury Inflation Protected Securities: Often abbreviated as "TIPS", these types of securities are bonds offered by the United States Treasury Department. In simple terms, TIPS are basically "IOUs" from the federal government that promise to keep up with the rate of inflation to maintain the value of the bond. They're a pretty great choice for people who are interested in very minimal risk, but want to still maintain the integrity of their earnings. As the bonds are backed up by the U.S. government, they're practically guaranteed.

Commodities: Commodities are notorious for going up and down in price very quickly due to the fact that they're heavily subject to changes in demand for products and services. This price volatility makes commodities normally a risky investment that more casual investors should steer clear of. However, during periods of high inflation, like the one we're going through now, commodities become much more precious as their value doesn't fluctuate nearly as much as currency. This makes commodities a great way to store the value of money at the very least, but could potentially see significant profits in the event of economic improvement.

Value Stocks: While stocks are practically a no-brainer when it comes to making sound investments, not all stocks are going to avoid the impact of inflation. In particular, growth stocks, which are stocks that don't possess metrics that knock it out of the park, but show a lot of potential, tend to do poorly during inflationary periods due to their lack of adaptability. By contrast, value stocks do quite well. Value stocks are stocks in companies that show exceptionally high levels of success in certain metrics, like income statements or price to earnings ratios. These companies tend to do well in response to inflation as their popularity with consumers and high cash flow gives them a great deal of adaptability. When looking for value stocks, make sure to look out for ones that don't offer dividends as company reinvestment during inflationary periods will do much more to increase the value of a stock when compared to the money obtained from dividends.

Making The Right Investments

Inflation is well-known for causing trying times and it's very important to do what you can to negate the effect of it whenever possible. Still, it's good to keep in mind that inflation isn't the end of the world. While it's likely to make many aspects of your day to day life more difficult, it's also a natural economic process that can be adapted to if you know how.