What is Inflation, What Causes it, and Why Does it Matter?

By Josefin Gatsby on 12/15/2022
Since inflation affects the value of the dollar, inflation will cause the value of your savings to sink. Understanding how inflation work is crucial in order to know how to beat it.

 

What is inflation? 

 
In simple words, inflation is an increase in prices or expenses over time. The rise in prices is often expressed as a percentage with the average year by year inflation rate of 3.27%. However, inflation recently hit a 40-year high.

According to the Bureau of Labor Statistics (BLS), in June 2022 inflation measured by the consumer price index (CPI) increased 9.1% over the prior 12 months. This is the highest inflation rate we have had since 1982.
 

What causes inflation? 

 
Inflation rises when the Federal Reserve sets the interest rate too low or when the growth of money supply increases too fast. 
 
High inflation can also be a result of a hot economy where people have extra cash and want to spend. If consumers are buying lots of goods, businesses may need to raise prices because they are lacking supply, or simply because they can increase their profits due to the high demand. 
 
Some inflation is important for a growing economy, but too high inflation rate is a sign of an imbalanced economy. 
 

Why is it important to keep up with inflation? 

 
Inflation causes a loss of purchasing power over time, which means your dollar won’t be worth as much tomorrow as it is today. 
 
With rising inflation, everything from groceries to cars become more expensive, and it may be harder for individuals to afford everyday essentials. If your income doesn't increase by at least the same rate of inflation, your salary will equal to less value than it did in the previous year. The same concept goes for your savings. If you are keeping money in your bank account, the money will lose value to inflation over time.
 

How to beat inflation with real estate?

 
The best way to keep up with inflation is to keep your money invested. The primary benefit of investing during inflation is to preserve your portfolio's value. The second benefit is that you can continue to grow your money. 
 
Real estate is an ideal investment vehicle during inflation. Real assets naturally keep up with inflation since properties appreciate in value over time. With short-term, value-add real estate opportunities from Gatsby Investment, you can grow your savings while also serving as a hedge against inflation.  

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