How to protect your savings against inflation.

Possibly the word "inflation" is one of the most heard economic terms in the media, almost always with negative connotations, but not always; in fact, like almost everything in economics, it's more a matter of balance. An inflationary scenario can be as worrying as a deflationary one. A moderate rate is not a problem in principle, especially if we invest our savings to cope with it.

But, what is inflation?

It consists of the generalized and sustained increase in the prices of goods and services over the course of a year.

In other words, we could say that we call inflation the fact that prices "inflate" over a period of time.

 What goods and services are analyzed?

Since it would be almost impossible to analyze them all, a "basket of goods" is elaborated with the most consumed items such as food, clothing, medicines, transportation, housing, and leisure. The percentage growth of this basket gives us an index, the CPI, which we will use to measure inflation.

The INE (National Statistics Institute) publishes the weighting of the CPI in Spain.

When a better measurement of the core of inflation is desired, the most volatile elements are excluded, and we speak of underlying inflation, which is the CPI minus the variation in the prices of energy products and raw foodstuffs.

How is the "Inflation Rate" measured?

The inflation rate will be the result of applying the following formula:

[(Final CPI - Initial CPI) / Initial CPI] * 100

Causes of inflation:

By demand increase. It occurs when the demand for goods exceeds the supply of products. In this context, prices tend to rise.

By increasing the cost of raw materials (oil, energy, copper, etc.). The producer in this case will try to maintain its margins by increasing prices.

Due to expectations. If these are usual and with strong increases, workers resort to asking for salary increases to counteract the effects, which leads employers to increase prices to cope with said increase. This would lead to a vicious circle.

By increasing the money supply. Governments, to finance the fiscal deficit, may resort to financing it with debt or by printing money, the latter implying a greater money supply that leads to an excess of money that promotes a price increase.

Self-built. When there is an anticipation of a strong price increase, adjustments can be made in advance so that said increase is gradual.

Classification:

Moderate. Slow price increase. Galloping. Increases in prices in percentages of two or three digits in a year. As money loses value very quickly, contracts are usually related to a price index or a foreign currency such as the dollar. An example of this would be Argentina, whose average rate in the last hundred years has been 105% annually.

When inflation is high, imports increase because it is cheaper to buy abroad, and exports decrease because we are expensive for other countries; this ends up causing a depreciation, devaluation of the currency. If our inflation is recurrently higher than that of our trading partners, we see our currency depreciated/devalued recurrently as has happened in Argentina.

Hyperinflation. When the price index increases by almost 13,000% annually. It is an abnormal inflation, a symptom of a severe crisis.

Effects of inflation:

One of the effects is the loss of purchasing power of the population due to the decrease in the value of money in relation to the amount of goods or services that can be purchased with said money. One measure to counteract this loss of value is to invest our savings with the aim of obtaining a return greater than or equal to the existing inflation.

Hyperinflation poses problems not only for people , but also for companies, which do not have a stable framework to thrive and end up disappearing, with the increase in unemployment.

It is true that a contrary scenario can also occur but paradoxically a decrease in prices, called deflation, is also not good for the economy, since it enters a dangerous spiral: as goods and services decrease in price, it is logical to delay purchases and investments (it will be cheaper tomorrow), companies do not make money and disappear, generating unemployment.

That's why the ideal situation is for prices to increase slightly; in fact, many central banks set the inflation target at 2%.

As we can see, the tendency is to achieve balance, and it is taken for granted that a country that achieves it will have a rate around that two percent figure. Therefore, one of the main reasons to invest our money must be to achieve a return equal to or greater than that rate.

At INVERSA, we offer a return between 4%-8%, making it a perfect alternative to protect the value of our money.