How Inflation Affects Your Investments

The following is a guest post and does not necessarily reflect the views of Jemstep.com

Inflation is the precipitous rise in the prices of goods and services in an economy over a sustained period of time. The inevitable consequence of the prices of goods and services escalating is that individual units of currency purchase fewer goods and services. In other words, inflation translates to a reduction in the purchasing power of an economy’s currency.

The inflation rate is usually employed by economists to track the change in purchasing power over time, through the consumer price index.

The Los Angeles Times says that economists view inflation as much more imminent and dangerous than deflation. The same source contends that the two most popular safeguards against rising inflation are real estate and precious metals. Let’s look at these options.

Gold vs. Real Estate

There are both advantages and disadvantages to investing in gold in order to safeguard against inflation. Gold does not pay interest or dividends and might go missing. Also, gold’s prices have historically fluctuated over short periods of time, yet gold remains a reasonable hedge and prudent long-term investment.

Real estate, on the other hand, might be more sustainable long-term in the wake of a double-dip recession and sub-prime mortgage crisis. Many homes are relatively cheap right now as home buyers are scrambling to avoid foreclosure. Real estate prices are still comparatively depressed in the United States.

Inflation-Indexed Securities

During the 90s, the United States Treasury unveiled inflation-indexed securities. The idea behind these securities is to anchor and ensure the value of the bond to fluctuating consumer price index figures. Thus, there is relatively little risk in purchasing inflation-indexed securities as a hedge against a small amount of inflation.

In essence, though, hedge investors considering inflation-indexed securities will glean both interest and inflation fluctuations from inflation-indexed securities. For home owners or relatively frugal investors, the inflation-indexed securities route is perhaps safer insurance against inflation than real estate or gold.

Dani Rodriguez writes about all things related to her career in finance. Her recent work is on how to become an Investment Banking Analyst.