Inflation refers to the general rising of prices for goods and services in the economy, due to an increase in the amount of money and/or credit available. This can be caused by an increase in the level of government spending, and/or a decrease in taxes, giving individuals and businesses more income to spend on goods and services. When this occurs, the purchasing power of your dollar falls. For example, if the rate of inflation is expected to be 2% this year, a $1.00 chocolate bar will cost $1.02 at the end of the year. Central banks in each domestic economy attempt to keep inflation between 2-3% per year, to avoid rapidly increasing prices. Investors have several options to protect themselves from inflation. These stock sectors include:
- Large retail companies that are able to easily adjust prices higher.
- Companies that sell or produce commodities like oil, copper, gold and silver because these hard assets will rise in value along with inflation.
- Real estate investment trusts (REITs) which also rises in value with overall rising prices.
- Treasury Inflation-Protected Securities (TIPS) which are inflation adjusted bonds that protect wealth against rising prices.
When inflation starts to increase by large amounts, 50 or 100 percent per year, that is called “hyper” inflation and the value of a currency starts to fall quickly.