Money, its value, and the financial world are in a constant state of flux. Indeed, you only have to look at your income and expenditure over time to see how resources rise and fall.
Now, if you widen your gaze and consider the ebb and flow of money on a global scale, you’ll start to see why economists are often in a tough spot. Predicting how economies are going to expand or contract isn’t an easy task, particularly when inflation spirals out of control.
Relative Value Will Always Rise and Fall
We often see and hear the word inflation bandied about in the media, but what does it mean? The simple definition of inflation is a reduction in purchasing power of a currency over time. So, in the UK, this basically means that £1 buys you less now than it did in the past. An example from the early part of 2022 also shows the impact inflation can have. The US inflation rate averaged just under 2% between 2012 and 2020.
In 2021 and the first quarter of 2022, it went from 7% to 7.9%. The sharp rise caused the price of everyday living to increase for Americans. Everything from the price of groceries and fuel to housing increased due to inflation. That wouldn’t be a problem if wages rose in line with inflation. However, that hasn’t happened. According to a report by the Peterson Institute for International Economics, US wages grew by 4.5% in 2021.
That was the fastest annual rise since 1983. Had inflation not jumped to 7%, the average inflation-adjusted wage increase would have been over 2%. As it transpired, inflation-adjusted wages actually fell by more than 2%. This is the impact inflation can have when wages aren’t increasing at a similar rate. People may earn the same, but the value of what they’re earning isn’t the same. As such, you get less for your money when you spend it.
Saving or Investing: What’s the Best Way to Combat Inflation?
This could suggest that not spending money and waiting for inflation to slow down is the answer. The reality, however, is different. Saving money over the long term, particularly when inflation is high, isn’t always the best strategy. In fact, you don’t even have to think about current times to know that’s true. If someone put their wages into a 0% interest bank account in 1950 and wanted to spend it today, they wouldn’t be able to buy anywhere near the number of things they could have back in the day. This is why financial experts often cite the potential benefits of investing. Putting a percentage of your savings into a tax-efficient investment product is a way to combat inflation.
As any guide to investing in shares will tell you, buying and selling shares comes with a certain degree of risk. The value of your investment can decrease. However, it can also increase and, importantly, increase faster than inflation. The good news is that modern technology has made investing more accessible than it’s ever been.
There are plenty of apps that not only allow you to buy and sell stocks, but track the markets, get expert insights and follow the latest headlines. These things are important when it comes to investing. Don’t forget the basics, such as setting an investment goal, researching the markets and maximising your potential by using products such as ISAs. None of this will guarantee that your investments make a profit. However, if you do enough things right and the market is on your side, you have the potential to stay ahead of inflation. And, as we’ve seen in recent times, that’s more important than ever right now.