All you need to know about inflation 2024

January 25, 2024
9:52 am

Inflation is struggling. Why? The Israel-Hamas war seems to be escalating as its consequences reach further into the Middle East. Pakistan’s military carried out targeted strikes against militant hideouts in Iran on Thursday, responding to an attack by Tehran a day earlier. The US and UK struck Iranian-backed Houthi militants in Yemen for a fifth time in a week after the Houthis attacked another commercial boat in the Red Sea.

This significantly impacts global shipping as cargo ships are forced to travel further around Africa to avoid the conflict zone before delivering goods, just as the drought in Panama is forcing cargo ships to travel around South America to transport goods or transport cargo across the Americas.

These conflicts and environmental issues are forcing transporters to spend more on finding alternative cargo routes, which, in turn, will raise the prices of goods. Not to mention that delays in shipping will increase the demand for goods. These events are threatening to add pressure to the already struggling global inflation.

What is inflation?

Inflation measures how fast the price of goods and services rises

High inflation leads to higher prices for basic necessities like food, utilities, and medical care. Lower inflation means that the costs of goods remain stable. Inflation can be problematic as money saved today will be worth less tomorrow. Inflation erodes the value of money.

What causes inflation?

Generally, inflation is caused by increased production costs and wages, a surge in demand for goods and fiscal policy as governments make economic decisions regarding their economies.

Cost-push inflation

This occurs when prices of goods rise due to production cost increases. This could be caused by higher wages and more expensive raw materials like iron ore, wood or silver. The demand for these goods remains the same, but the supply will decline and cost more to manufacture, thus pushing up prices for consumers.

Natural disasters

Natural disasters like severe droughts, hurricanes or volcanoes could also drive up prices. For example, if the wheat crop of a major wheat producer is destroyed due to extreme drought, then all wheat-based products will increase in price as there is a production shortage.

Demand-pull inflation

This is when consumers have a high demand for a product or a service. When there is low unemployment, and consumer’s wages increase, they spend more. This increased spending leads to a higher demand for goods and services, which could lead to shortages. Consumers are willing to pay more to obtain these goods and services, and prices go up.

Buit-in Inflation and rising wages

Employees have gotten used to the rising cost of living in modern times. As a result, they anticipate the rise in inflation and demand higher salaries to maintain their standard of living. This increases production costs for companies, which could push up the prices of goods and services. The rise in wages means more disposable income for consumers and a higher demand for goods as they spend this disposable income, resulting in even higher prices. It’s like a vicious circle that will ultimately bring on higher inflation.

Monetary devaluation

Inflation can be caused by too much money in the economy. Money has a certain value, and like supply and demand, if there is too much money floating around, then the value of money drops (a surplus makes things cheaper while a shortage makes it worth more; for example, diamonds are valuable because they are rare, if suddenly there was a surplus of diamonds, then prices would drop because they are not as rare and valuable anymore).

Also, monetary value is dependent on the confidence and trust that is held in the issuer of the currency. The US dollar, Pound Sterling and Euro are strong currencies held by solid economies, while the Venezuelan bolivar is practically worthless and suffers from hyperinflation at 400% inflation. The ECB targets annual inflation to be 2%.

How can you mitigate the effects of Inflation on your Investment portfolio?

Diversify portfolio
When investing, don’t carry all your eggs in one basket. Diversifying your portfolio into stocks, bonds, cash, different sectors and economic regions helps mitigate losses if one investment performs poorly.

Invest in high-yield savings accounts
Don’t let your savings lose value due to inflation. Invest in high-yield savings accounts where you earn a higher annual percentage yield. It might not match inflation, but it will help avoid losing too much value.

Invest in the stock market
Investing in stocks can help beat inflation. Although volatile, the stock market’s average annual return between 1926 and 2021 is 12.3%. This is ideal for long-term investing as your investment can ride the ups and downs in the market.

Invest in assets like gold and property
Gold and real estate are considered a hedge against inflation. Rental properties provide an income, and when inflation rises, you could increase rent to make up the difference. Also, an income property with a fixed-rate mortgage will help finances.

The Middle East is one of many global events that have wreaked havoc with inflation and interest rates. The pandemic, the Ukraine-Russia War, and China’s struggling economy are catalysts affecting global inflation. To protect your investments from inflation, seek the advice of a wealth advisor and ensure that your portfolio is suitably diversified over the long term.

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your advisor for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.