Inflation is an economic term that has been in the news more and more lately. But what is inflation and how can you take it into account as an investor? Inflation is the rise in the prices of goods and services over a period of time. It is measured through an index, such as the consumer price index (CPI), which indicates the average price change of a basket of goods and services over time.
A little bit of inflation is necessary for a healthy economy, but too much inflation can cause problems. With high inflation, the value of money decreases, so people save less, and companies invest less. This can lead to a decline in economic growth and an increase in unemployment.
There are several causes of inflation, including an increase in demand for goods and services, an increase in the cost of production, and an increase in government spending. Moreover, changes in a country’s economy, such as economic growth or recession, can also affect inflation.
At the moment, inflation is very high in the Netherlands. A frequently mentioned cause is the war in Ukraine, but that is not very nuanced. There are several factors for the high inflation. The war in Ukraine does have an indirect influence. The sanctions imposed on Russia by the war and the resulting increase in energy costs have a major impact. This impact has an impact on the entire Dutch economy. Due to the increased energy costs, the costs for companies that pass this on in their products are increasing. As a result, the prices of consumer goods are also rising.
The central banks of most countries, in our case the Dutch Central Bank and the European Central Bank, monitor inflation and adjust their monetary policy to keep it at a healthy level. This can be done, for example, by raising or lowering interest rates or by spending more or less money.
The ECB radically changed its policy a few months ago. Where the policy was to keep interest rates as low as possible, the policy now is to raise interest rates. The goal is to slow down the economy, causing inflation to fall.
To reduce the effects of inflation on your assets, consider investing. Please note, investing has risks and you can lose all or part of your investment.
Here are some ways an investor can deal with inflation:
- Diversification: We’ll say it again, but the diversification of an investment portfolio is very important. It reduces your risk. Choose a portfolio that is as diversified as possible or choose products that already include the spread. Examples include mutual funds or ETFs.
- Make a plan: It is important to create a financial plan and consider the impact of inflation on the financial goals and plans. For example, you can adjust your financial goals in time to the expected inflation.
- Conscious investment decisions: It is important to make conscious investment decisions and consider the impact of inflation on the investments and the portfolio when making investment decisions.
It is important to note that no strategy offers 100% protection against inflation, past performance is – unfortunately – no guarantee for the future.
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