A gallon of gas cost 27 cents at American pumps in 1957. The average house cost $20,000 and a brand new Ford automobile sold for $2,500.
Today, that gallon of gas will set you back around $2.50, an average house costs $200,000, and you can drive away in a new Ford after plunking down $15,000 for a Fiesta, $24,000 for a Fusion or $30,000 for a Taurus.
Prices 62 years ago were significantly lower due to inflation, the sustained increase in the price of goods and services. Think back to what a gallon of milk (or a Big Mac) cost when you were younger. Odds are that you paid less in the past.
There are two types of inflation which often influence each other and typically have a negative impact on people and the economy:
Price inflation occurs when the overall level of prices of goods and services increases over a period of time.
Monetary inflation is signified by a rise in the quantity of money in an economy.
People combat rising prices by hoarding food and other commodities, electing to spend their cash before it is worth less (or worthless). Economic analysts say hoarding creates shortages of the hoarded objects. The Department of Homeland Security considers people who shop at bulk stores as being anti-American hoarders and put them on its suspected terrorist list.
The law of supply and demand prevails in the marketplace. When public perception is that supplies are getting scarce, prices go up. Before Hurricane Dorian passed the southeastern United States, one store jacked up the price of a $5 package containing 24 bottles of water to over $23!
Inflation reduces the amount of money people save. With interest paid on an average savings account at less than 1 percent (0.09% APY) and the current overall inflationary rate, which includes food and energy, at 1.8 percent (forecasted to rise to 2.3 percent by year-end), the spending value of savings account balances goes down, day after day. “Might as well spend the cash now on something else,” a lot of people figure.
Taxes go up, companies think they are profitable when they aren’t, and the currency is debased (lowered in value) as negative consequences of rising prices.
The only positive effects of inflation go to the people responsible for it in the first place, as well as benefiting cartels by driving smaller competitors out of business. Early and first recipients of the inflated money who avoid the negative effects of future inflation also stand to gain from higher costs.
Experienced investors know there are profits to be made in good financial times and bad financial times. Historically, there are three types of investments used to hedge (protect) against the value-eroding effect of inflation: real estate, commodities, and certain equities (stocks and bonds).
Real Estate is regarded by the investment world as a sure thing. There is only so much habitable land and more people want it every day. Not only does the property value rise over time but a building on land can generate rental income. Investing in a real estate investment trust (REIT) is an indirect way to make gains against the creeping inflationary rate.
Commodities are tangible assets – things you can see and touch. Gold, oil, soybeans, orange juice, and pork bellies are all basics to human existence. Survival in our modern society depends on groceries being delivered to stores on time. Someone quipped that we are a mere nine meals away from riots in the streets. Betting that the value of basic, essential commodities will rise faster than inflation is what keeps the stock market ticking.
Some corporate stocks continue to rise during a down market. However, investing in stocks is risky, especially if the economy bottoms out. Another stock-based strategy is to trade stock derivatives called options. Sell calls on an underlying stock you own or buy puts to bet on a falling market.
Bonds go up when stocks go down so savvy investors will bet a fall by putting their cash in long-term corporate debt instruments that have a very good chance of getting paid off upon maturation. Inflation-indexed bonds called U.S. Treasury Inflation-Protected Securities (TIPS) track along with the Consumer Price Index and appeal to many investors. At the opposite end of the risk scale, junk bonds (aka high-yield debt) can gain in value with rising inflation.
Other investments seen to hedge against inflation are leveraged, floating-rate loans that let the lender raise the interest rate charged to keep the return on investment (ROI) in step with inflationary increases. Some speculators favor securities whose underlying assets are loans rather than shoulder the debts themselves and trade structured pools of mortgages termed mortgage-backed securities (MBS) and consumer loans called collateralized debt obligations (CDOs).
All investments carry with them the potential for gain or loss. Keep the goal in mind: gains above inflation. Avoid the need for greed and plan ahead. No one got rich in a day.
Remember, too, that the best investment you can make is in yourself. Strive every day to be a better person than you were the day before. Improve your health and wealth, family, friends, and faith.
Spend less on life and enjoy it more. That is the secret of the ages and works very well against the Higher Price of Everything.