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Understand inflation and how it affects your future Print E-mail

Tuesday, 30 July 2013 00:00

Written by Paul Drockton

As a Financial Consultant with more than 20+ years experience I can tell you that inflation is a double edged sword.   

First, let's look at the pros:

1. If I buy a house for $200,000 and the cost of building a new one also increases, it makes my mortgage of $200,000 feel like $100,000 or less depending on the rule of 72s and the rate of inflation. For example if the rate of inflation is 10% then I divide 72 by 10 and it tells me that my $200,000 mortgage will feel like $100,000 in today's money in 7.5 years. Thus debtors benefit as long as they have a fixed rate of interest that is less than the rate of inflation.

2. Inflation adversely effects the stock and bond market but will positively influence the foreign currency market and lead to dramatic gains in gold and silver. In fact, gold has averaged close to 30% return over the past 7 years and is great for IRA rollovers! When one horse is dying another is finding new life.

3. Money can also be made in the futures market in any commodity (oil, gas, wheat etc.,) during an inflationary cycle.

Now for the down-side:

1. Inflation will kill your 401K, State Retirement Plan, bonds, savings bonds and any other cash investments because it forces interest rates to go higher and new bonds are in competition with the existing ones in your portfolio. Thus, higher paying bonds cause yours to loose value.

2. Wages rarely keep up with inflation and most people are not sophisticated enough financially to reap the benefits. Thus, 99% will be on the losing end. Among these are Farmers that are selling into the futures markets at a guaranteed price, builders that sell at a fixed price or anyone else that cannot provide immediate delivery of a product or service.

3. As production costs increase, it cuts into profits and leads to cost-cutting that may be at the expense of the consumer who is very "price sensitive".

Inflation is a double edged sword. As long as you know which side will cut you, you can actually benefit from it. Sadly, though, the average individual will never realize those benefits with variable rates on their consumer debt; food and housing expenses; transportation costs; etc.

 

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