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Why Does Inflation Erode Wealth?

Inflation is undoubtedly a central factor in the erosion of one’s wealth. Over time, and with the increased inflation of the price of goods, your savings is worth less and less. 

Though the effect may seem small in the short term, inflation can severely erode your wealth over time. Let us look at how inflation causes a devaluation in wealth.

What Causes Inflation?

When prices start to rise for numerous economic or sociological factors, it decreases the purchasing power of a currency. The rise in prices is connected to inflation and it happens in two ways. One is known as ‘demand-pull inflation’ while the other is called ‘cost-push inflation.

When demand for goods or services rises but the supply remains the same, that pulls up prices, it is known as demand-pull inflation. On the other hand, cost-push inflation is when the supply of goods and services is limited, and the demand from the consumers remains the same, which results in the prices rising.

How Does Inflation Erode Your Wealth?

Though inflation is often good for investors holding certain commodities and assets, it is detrimental for anyone on a fixed income. But the affect that inflation will have is also unpredictable, because it also decreases the value of long-term bonds, which pays out a fixed income amount every year. An increase in inflation decreased the purchasing ability of a fixed amount of money.

It is known that inflation carries the risk of rising interest rates, which inadvertently increases borrowing-related costs and can put pressure on asset values. The value of money decreases in value over time as prices rise. For example, a life insurance policy purchased in 1950 to pay out £10,000 at the time of death is worth much less in 2020 than it would have been at the time of purchase. 

How Can You Safeguard Against Inflation?

Gold is one of the best failsafes against inflation.  Professional investors buy gold because it acts as a hedge against inflation. Gold can act as a long-term store of value. When inflation rises, it reduces the value of the dollar. But what also happens is that the cost of every ounce of gold (in dollars or foreign currency equivalent) will begin to rise in response.

Conclusion

Unfortunately it is very difficult to control inflation. But you can take proper steps to ensure a proper safeguard against rising inflation.

Buying physical gold often proves to be a good hedge against inflation. Since gold has been a historical safeguard against inflation, now is the time to start investing in the precious yellow metal by looking into bullion bars or coins, which you can find on the trusted platform SuisseGold.eu.