If you’ve watched the news lately, you’ve likely heard about the risks of inflation. It’s coming at us at a much higher speed than normal as the economy and business world work their way out of the pandemic state they were in for over a year.
In many markets, inflation is as high as 5%, which is an unprecedented rate compared to the past few decades. Fortunately, you can use real estate to hedge against inflation.
Here’s how.
Understanding Inflation
Inflation is a decrease in your purchasing power. The dollar becomes worth less than it was yesterday, which means it takes more money to buy the same products, assets, or investments.
It happens when there’s more money available (stimulus money) and a higher demand for products and services. When people are willing to pay more for things, it drives up prices and drives down the value of the dollar.
As prices increase, the value of the dollar decreases, which can make even the best investments worth much less than before.
Inflation Predictions for 2022
Experts so far believe we’ve seen the worst of inflation as of the last quarter of 2021. As you might have seen, gas prices decreased slightly in December which was the first sign of good things to come.
Experts believe we won’t see an increase in inflationary rates that hit almost 7% in 2021 in 2022. It will take a while for the economy to settle down again, but as supply increases and demand settles, inflationary rates will slow down too.
However, this doesn’t mean you’ll see prices fall. The higher prices we’ve had to adjust to quickly are here to stay. Some higher prices won’t affect you as much, like a gallon of milk or a carton of strawberries. Even if they cost 20% more than before, it won’t cause you to go bankrupt.
Where it can affect people the most, though, is in larger assets, like real estate. If a home costs 20% more than last year and it originally cost $200,000, you’re looking at a price of $240,000 this year – that’s a difference of $40,000.
That being said, real estate can be a great way to hedge against inflation, so it’s important to position yourself so you can buy real estate and possibly avoid other inflationary-prone assets.
Why you Should Worry about Inflation
Inflation is always an issue, even when we aren’t in periods of high inflation like right now. Each year, the Fed predicts an inflationary rate of at least 2%. Again, that doesn’t sound like much, especially when you’re talking about low-ticket items.
But over time, that inflationary rate cuts your purchase power by the double digits. A 3% inflationary rate, for example, can almost cut your purchasing power in half in the next 40-50 years.
So, it’s not something you have to lose sleep over tonight because it will affect your ability to buy groceries tomorrow, but it is a concern that you should keep at the forefront of your mind as you consider your investment options.