How to profit from inflation with financial IQ?
How we can profit from inflation with financial IQ?
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What causes inflation?
There are different ways inflation can happen in an economy.
Rising demand for goods can cause the supply to go down, thus increasing prices. You can see this in a hot housing market where the number of people wanting to buy a home is larger than the number of homes on the market.
Rising costs for things like labor and materials can result in the increase of prices. For instance, a while back the global prices of hops went up and the cost of a six pack went up a couple dollars. I remember buying beer a few years ago for $6.99 a six pack. Today it can be $9.99 or higher.
The relationship between the rising costs and workers wage expectations also contribute to inflation. This is called the “wage-price spiral". Simply, it means that as prices go up, workers expect to be paid more…which in turn makes prices go up.
A fourth way inflation can happen is when the government manipulates a money supply, like the US has done with quantitative easing after the last financial crisis, aka printing money. As a refresher, QE is when the Fed bolsters its balance sheet by buying treasuries to keep interest rates low. It’s like if you or I were printing dollars to pay off our credit cards.
What types of inflation are there?
There are many types of inflation but the main three are creeping, walking, and Galloping or hyperinflation.
Creeping inflation is the normal, mild inflation most economies want and expect. For instance, the Federal Reserve sets their policies hoping to target a 2% inflation rate. This is considered healthy for an economy, and theoretically employee wages can keep up with this.
Walking inflation is an acceleration of inflation in the 3-4% territory. This starts to become harder for wages to keep up with and people begin to feel poorer.
Hyperinflation is extreme inflation that can go as high as 20%, 100%, 200%, or even more. In the Weimar Republic hyperinflation was so extreme that “A loaf of bread in Berlin that cost around 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923.”
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