What Are The Hidden Costs Of Inflation?

There is always so much talk around inflation and how heavily it affects different aspects of the economy. But what really is inflation? It is essentially an economic phenomenon that causes a broad rise in the costs of services and goods over time. Inflation fundamentally occurs when there is an increase in demand or a decrease in supply, which directly impacts everything and everyone from consumers, investors, real-estate to tax policies, interest rates and more.

One of the most crucial impacts of an unexpected inflation is the loss of purchasing power. It is particularly damaging towards low-income households when there is a sudden rise in the prices of common necessities of life such as food, housing, clothing and healthcare.

So while moderate inflation is common and almost expected from time to time, it is always best to understand both aspects - how it can impact your personal finance as well as the effects it could have on the economy as a whole.

Impact of inflation on cost of living

The cost of living will vary based on your geographic location and demographic factors. Its main components primarily include housing, transportation, food, utility costs, healthcare and taxes. During inflation, it is common for all these components to witness a rise in prices, which over time, erodes purchasing power.

High petrol costs, expensive utilities, a hike in interest rates on home loans, all lead to lower savings and force consumers to buy less or explore cheaper alternatives. Additionally, it can become even more challenging to keep up with growing expenses when your salary is not increasing at the same rate.

This is where smart investment planning, featuring a diversified portfolio, can be of great help. It could potentially save you from financial distress in the future. To help you make better informed financial choices, you can get in touch with reliable wealth management companies like Dezerv, that can help you maximize your financial growth and effectively manage your investments portfolio.

It is best to look for safe investment options that can offer you inflation protection and keep you financially secure. Gold has been historically known to be a popular investment option and the best hedge to protect your financial portfolio from inflation.

Impact of inflation on investments

Inflation essentially reduces the value of money which directly impacts various aspects of the economy. A few of these negative impacts are misallocation of resources, tax distortions, wealth redistribution, painful recessions etc.

As the prices of commodities increase, people will be forced to spend more, leaving less money for investments. This reduction in overall investments has a harmful impact on capital accumulation of the economy, since the latter is directly dependent on the growth of investments.

Moreover, this is also the time when speculative investments increase. Due to rising prices, people become unsure of when and how much investment prices will drop or increase. So, they start experimenting with an array of different investments like real estate, shares etc simply based on speculations. Such investments do not necessarily help in creating any productive capital within the economy. This is also a risky alternative and could lead you to incur losses if you make hasty investments.

Impact of inflation on your finances

It is important to note that during inflation, your expenditure is likely to rise whereas the value of your savings will keep reducing across a period of time. This is why, while making long term investments and saving money for your retirement corpus, you must also account for the rate of inflation. Additionally, choosing appropriate high return investments can further help you counter the impact of inflation.

In terms of income, people belonging to a fixed-income group will observe a drop in their purchasing power, which means their income will decline. While this eventually gives rise to inequality in income distribution, it is the reality of what unprecedented inflation leads to.

It is important that you take control of money matters and design your investments portfolio in a way that you remain as financially secure as possible even through changes in the economy. While you may not be able to become completely inflation-proof, what you can do is balance out your portfolio with fixed income assets, equities and gold to hedge your bets.