Investing
How Does Inflation Influence Investing
?When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom.? -Peter Lynch
There has been a huge increase in inflation over the last 50 years. Just after the second World War you could buy milk for $0.20 a gallon and a new house for just under $6000. Obviously, prices have climbed a great deal since then. Inflation became a major concern of the public in the early 1970s when it reached well over 9%. Today, the topic of inflation is debated and certainly a rise in inflation causes fear in the hearts and minds of the general public.
Oddly enough, most people do not know much about inflation and really do not know if they should be afraid. The term inflation refers to a long term increase in the level of prices for products and services. Inflation is measured yearly. As inflation increases, what your dollar can buy decreases. Inflation causes the value of the dollar in the national and global economy to decrease. The value of the dollar is a measure of how much you can buy with that dollar. For example, a candy bar that costs $2 dollars this year will cost $2.04 next year with a 2% increase in inflation.
Terms to Know
Deflation : This term refers to when the level of prices is decreasing. Deflation is the opposite of inflation.
Hyperinflation : This is when inflation increases substantially and without notice. This usually leads to problems with the nation's money structure. For example, in 1923 Germany, price levels increased by almost 3000%.
Stagflation : This term refers to the combination of increased unemployment and a flat period in the nation's economy.
What Causes Inflation
There are many theories about what causes inflation. Here are two of the most common theories. The first theory is ?demand pull?. This theory speculates that inflation is caused when there are too few products and too much money. This usually occurs in a growing economy. The second theory is called ?cost push?. This theory asserts that as the costs of companies increase, these companies increase the price level of their products to compensate.
How Does Inflation Effect Investing
Inflation has a different affect on everyone. Ultimately, the impact of inflation on investments and all financial situations is whether it is anticipated or unanticipated. If you anticipate inflation, you can make adjustments in your financial plan to compensate for the increased prices. Inflation has a negative impact when it is unexpected.
The problem with inflation is that it often makes companies look like they are growing and their profits are overstated. A growing company is a tempting investment. However, if that growth is really due to inflation, eventually the stock prices will level out and you will lose money. Understanding and monitoring the inflation rate is essential to maintaining a healthy stock portfolio.
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Mika Hamilton
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