So I went to another store. Same results. Prices were marked up ten times what they normally were. A bottle of coke was $10!
In a panic, I ran to the nearest store clerk and asked him why prices were so high. I said, “It’s 2010 man. We’re in a recession. Why are these prices so high?” He looked at me like I was crazy and said, “sir, it’s the year 2050!”.
The shock woke me from my dream and I checked my my phone to make sure it was still 2010. Whew!
Okay, that was a lame story, but that’s what inflation is all about.
What is Inflation?
A common question is “what is inflation?” Inflation is simply the general rise in the price of goods and services over time.
Basically, when the price of the sandwich you buy for lunch rises, the dollar that you use to buy it is worth less.
So, over time, the nature of inflation is to reduce the value of the exchange currency. This explains why you could by a can of coke for $.25 when I was a kid. But now they cost $.75.
Inflation is measured by watching the change in an index, like the Consumer Price Index (CPI).
Effects of Inflation
Historically, the inflation rate has been around 3%. We had a high period of inflation in the 1970s here in the US, with annual inflation rates for some years more than 10%.
High inflation is obviously not preferred because salaries can’t keep up, at least in the short-term. And, people who have money saved get hurt because their savings can now buy less. On the flip side, inflation can be good if you’re holding debt.
Most economists would prefer a low level of inflation vs no inflation though. From what I understand they like this slow increase in prices to keep recession at bay, and to have enough speed going to be able to press the brakes if needed without sending things in reverse.
Is High Inflation Coming?
We are currently experiencing very low levels of price inflation. The CPI hasn’t been increasing by much at all. In fact, some economists are starting to predict deflation.
This seems confusing to me though since we’ve done a lot of money printing in the last 2 years. Thus, high inflation, or even hyperinflation is a concern for many in the long-term. Confusing.
TIPS: Hedge Against Inflation
There are several ways to attempt to protect yourself against high-inflation. Dave Ramsey recommends real estate bought for cash. Some recommend commodities like Gold. And there is another way that’s I’ve never discussed here.
One of these ways is to invest in Treasury Inflation-Protected Securities (TIPS). TIPS are backed by the government, which have a fixed return, and are adjusted for inflation using the Consumer Price Index.
If you are concerned about future inflation it might be wise to consider them for your retirement portfolio.
What are you doing about inflation?