The points made by Jim Adams in his informative piece on inflation are well appreciated.
He says that lack of competition spurs companies to increase prices. Needless to say, it makes life difficult for the average citizen in any country. The US economy is under global watch, as it has a cascading impact on other economies too.
Layoffs by giants such as Amazon, Meta and Twitter are a cause of concern for all. Are we heading for recessionary times? Other than concerns of H1B visa holders (they need to find a job within 60 days or leave USA), a burning question for anyone would be – how long will the emergency fund last in inflationary times, after losing a source of income?
The Reserve Bank of India has been hiking interest rates for some time in a bid to control spiralling inflation. The target rate is 4%, whereas it hovers around 6% now. It is a boon to depositors who use interest on bank deposits as a passive source of income.
However, corporate India feels increase in lending rates reduces spending, and dampens growth in the economy.
Where does the twain meet?
IS ZERO INFLATION DESIRABLE?
It may take away the urgency from expenditure. I can afford to wait for some time, if I know prices will not increase in the near future.
And this is not good for business and GDP growth.
INVESTMENTS AS A HEDGE AGAINST INFLATION
1. Real Estate
Investments in real estate will go down, if people do not see prospects of appreciation in property rates.
Real estate is a double-edged sword. People borrow to buy a house and pay interest on it, because they expect higher returns with appreciation in property prices. It may not always be the wisest thing to do, given illiquid nature of the asset and rate of appreciation not being uniform across the country. But that is how the market works.
2. Gold
Gold is seen as a hedge against inflation. In India, the price of 10 grammes gold has always been equal to the amount a middleclass family needs for a month's expenses. At the same time, selling off family gold is viewed as a desperate measure.
Digital gold is gaining popularity, but is not risk-free. There is no regulatory body to control it. It is not easy to ascertain whether the issuing body is actually holding an equivalent amount of physical gold in its safe deposit vaults. One cannot hold digital gold for long periods. Investors are asked to sell it or take delivery of physical gold after a certain period. Capital gains tax is applicable on sale if one makes a profit.
I have a slightly different view on the subject of real estate and gold. These are preferred asset classes, being e a visible form of wealth. It is a measure of social status. The money stored in bank deposits or stocks and bonds remains hidden.
Real estate and gold counts more as vanity spending, than a store of long-term value. People often talk about absolute returns, rather than annual rate of return. And it conceals a lot of facts.
3. Annuity plans
One needs to carefully calculate assured returns in annuity plans. But investing some money today, which starts yielding a monthly income after 5-10 years makes sense.
It serves as a hedge against inflation.
4. Index funds
An investor who does not understand fluctuations of the stock market can safely invest in index funds. The money grows with the increase in stock market indices. There may be occasional blips, but the stock market grows in the long run.
5. Power of compounding in investments
The power of compounding gives magical returns only in the long run. Withdrawing money and re-investing it after a while will not serve the purpose.
INFLATION IS A FACT OF LIFE
Yes, we need to learn to live with inflation. Only the rate of inflation can be controlled. Stable prices will mean a loss for business, and governments will not let it happen.
The three things that help in combating the effect of inflation are
- Consistency in savings for long-term goals, even if it means cutting down expenses.
- Develop passive sources of income to supplement regular income from salary or business.
- Refrain from vanity spending. It decreases your net worth and spirals inflation further.
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