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Have you noticed an increase in gas prices in your area? Or maybe you’ve noticed an increase in the price of food?
This is called inflation.
No, not like when you blow up a balloon.
Inflation is when prices of a product or service rise due to an increase in the cost of production.
And once it starts happening in one area, people begin to fear that inflation in one sector will cause inflation in other areas.
Inflation isn’t just bad because things get more expensive. On a much larger scope of things, inflation makes your hard-earned money less valuable.
For example, if you invested in an ETF that gave you a return of 10% for the year, but inflation went up 3%, then you would have actually made a 7% increase that year.
Or worse, if you saved $5,000 this year in your savings account, inflation will make every dollar in your savings worth less. Even if you don’t touch it.
In this article we’ll discuss factors that cause inflation and how you can protect your money from it.
What causes inflation?
Let’s get down to the nitty-gritty.
Remember the concept of supply and demand?
It’s okay. Even if you forgot or if your school didn’t teach you, we’ll discuss multiple ways that the imbalance of supply and demand can affect inflation.
There are many causes of inflation and they can all be categorized into two different ways: cost push inflation and demand-puill inflation.
First, we’ll talk about these two types of inflation, and then we’ll discuss a few different real world examples that can lead to either of these two types.
Cost-push inflation
This is when the cost of production becomes too expensive causing inflation in
products and services.
For example, if an agricultural farmer is selling strawberries and they’re experiencing a drought in their state. Then this means that they may have to pay for more water, causing them to charge more to send strawberries to grocery stores and restaurants.
A sign of cost-push inflation may be a rise in the cost of a commodity like oil or water.
And in addition to commodities, the cost of production can also increase if the cost of labor is increased.
Let’s dive deeper into some examples of cost-push inflation.
Devaluation
In short, devaluation is defined as the process of decreasing the value of a country’s money in comparison to another currency. Devaluation is usually caused by the increase in the cost of imported products combined with an increase in domestic demand.
In simple English, devaluation is caused when more people are buying imported products even though they are more expensive.
Rising wages
Higher wages mean companies are paying more to their workers. And as a result, workers also have more money to spend. BUT the companies that consumers are buying from are now charging more so they can pay their employees more. Kinda like a cycle that just makes things more expensive, but consumers are able to afford it because they’re being paid more.
Expectations of inflation
Many experts say that the fear of inflation can cause inflation because workers will demand higher wages to combat inflation. And if companies grant their workers higher wages on a mass level, this can result in charging more for consumer products.
For example, let’s say Coca-Cola has 50,000 employees. Maybe Coca-Cola workers fear that inflation is coming. So they go on strike or simply ask for a bonus in their salaries.
If Coca-Cola pays their employees more, then they have officially increased their cost of production - making Coke products more expensive.
Demand-pull inflation
This occurs when there’s a dramatic increase in the demand for a certain product or service. If the demand is greater than the supply, then that product or service will rise in price.
A good example of demand-pull inflation can be seen in sports tickets. Before Lebron James joined the Lakers, you could get a nose bleed ticket to watch the Lakers for $40. But now that Lebron is on the team, the cheapest tickets are about $90 each because more people want to see him. That’s a huge difference in price just because of an increase in demand! You can also see this happen to concert tickets when an artist becomes more famous over the years.
Printing more money
Printing money can decrease the value of a currency simply because there’s more to go around. In some cases, (such as a recession) it is possible to print more money without causing inflation.
Can you benefit from inflation?
Inflation almost seems impossible to stop once it starts happening. So you might as well learn how to benefit from inflation.
And no, it’s not just the rich corporate owners that profit from inflation.
You can benefit from inflation too!
And the secret is to invest.
For example, if you invested in energy companies, you’ll probably see a surge in this sector causing your investments to rise because there is going to be a higher demand for clean energy companies.
Another example of an industry that has potential to see inflation is AI. AI is a growing trend that has a more than promising future. The cost of AI products and services is likely to increase and therefore you can expect to see your investments grow along with inflation.
How to protect your money from inflation
Can you guess the answer?
The best way to protect your money from inflation is to invest for the long-term.
At Call to Leap, we teach long-term investing strategies not just because you make money in the long run, but because you’ll beat inflation.
So if you invest in something like an ETF that mirrors the S&P 500, then your money is better off than if it were sitting in a regular savings account. This is because the S&P 500 grows at an average rate of 10% per year. Whereas if your money was in a savings account it may grow about 0.01% per year. The average rate of inflation is 2% per year. So, your money is actually decreasing in value the longer you keep it in a savings account.
What now?
According to Forbes magazine, the cause of inflation is more complicated than just an increase in our supply of money.
There are often multiple factors that cause inflation. And this article is meant to be a list of causes that we’ve experienced in our modern economy.
There are debates about how much our monetary policies cause inflation. And at the end of the day, the most we can do is educate ourselves and make our own speculation.
After reading this article, we hope you have an understanding of the different causes of inflation. And if you want to protect yourself from inflation by investing and would like to learn more, why not join our membership. With our premium membership, we’ll teach you not only how to invest in great long-term stocks, but also sell covered calls and cash-secured puts, trade LEAPS options, and generate a couple hundred to a couple thousand dollars each month. You’ll have exclusive access to our community of wealth builders & all our content, which teaches you step-by-step on how to use these strategies. You’ll also be able to ask me & our team any questions you have & we can coach you each week!