Monetary Inflation 101: Why It's Important

Monetary inflation affects all areas of your finances, from your savings to investments, debts and more. In this post we will explain what it is and how it affects both your own finances and the wider economy. We’ll also list what you can do to protect your money from the negative effects of inflation.

Table of Contents

What Is Monetary Inflation?

In economics, inflation is a sustained increase in the price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, it reflects a reduction in the purchasing power per unit of money. A loss of real value in the medium of exchange and unit of account within the economy.

The opposite of inflation is deflation. Deflation is a sustained decrease in the price level of goods and services.

The common measure of inflation is the inflation rate. This is the annualized percentage change in a general price index, usually the consumer price index, over time.

It affects your finances by decreasing the purchasing power of your money. In other words, if you have $100 today and there is a 10% inflation rate, then next year you would need $110 to buy the same goods and services. This can also lead to higher interest rates. As lenders will demand higher returns to offset the loss in purchasing power.

How monetary inflation affects your finances

Protecting Finances Against Inflation

There are several ways you can help protect your finances against high levels of monetary inflation, this includes doing the following:

Invest in assets that tend to increase in value during high inflationary environments. These include commodities such as gold and silver, real estate, and collectibles.
Holding cash in a foreign currency.
Investing in short-term government bonds.
Create a budget and stick to it, this will help you reach better financial decisions to keep you on track with your goals. Make budgeting simple by using apps like Simplifi.
Pay down variable rate debts like credit cards to avoid running up large debts that will become difficult to repay.
Move your cash savings to high yield savings accounts paying higher rates of interest. Although if you hold a lot of cash you should consider moving this into other investment assets more likely to produce a higher rate of return.

How to protect your finances in a high inflationary environment

How It Affects Stocks And Bonds

Stocks and bonds are some of the most widely held investments, but these too can be affected. Inflation is a major factor that can affect stocks and the stock market. When it is running high, it can erode the value of stocks and lead to lower stock prices. It can also make it more difficult for companies to earn profits, which can lead to lower stock prices.

It is also one of the key factors that affects bonds. When inflation rates rise, bond prices usually fall. This is because when inflation increases, the purchasing power of fixed-income payments decreases. In other words, bondholders are effectively getting paid less when they receive their interest payments. As a result, they demand a higher yield (or return) on their investment in order to compensate for the loss in purchasing power.

Is Inflation Bad?

While many people believe that it is always a bad thing, there can actually be some benefits to moderate monetary inflation. For example, it can help to reduce debt levels and increase economic growth.

Additionally, it can also make exports more competitive and help to boost wages. Of course, too much can be detrimental, but moderate levels can actually be beneficial to an economy.

Learn how the economy can affect your finances

Stagflation

When it comes to the economy, you often hear economists throwing out lots of strange sounding financial terms like stagflation. But what is this and how does it relate?

Stagflation is a period of time when the economy is stagnant and inflation is high. This can be a difficult time for people to manage their finances. As they may be facing higher prices for goods and services but not seeing any increases in their income.

Our website and blog can help people during these times by providing advice on how to save money, budget effectively, and invest for the future. We also offer tips on how to make extra money through side hustles and other creative means. By sharing this information, we hope to provide some relief and financial assistance during these challenging times.

Conclusion

As we can see, monetary inflation is a decrease in the purchasing power of money. In other words, when inflation goes up, each dollar you have buys less than it did before.

Some inflation can be beneficial for an economy, but can have a detrimental effect if it gets too high as it reduces spending and investment and can reduce returns.

It can affect everything in the economy, from the prices you pay for everyday goods and services to the performance and return of the investments you hold.

That’s why it’s important to be mindful of your spending, budget accordingly and ensure your investments are working hard for you.

Make sure you sign up for our newsletter and view our blog for more help with your personal finances including budgeting, saving and investing.

Other financial posts you may find useful;