What is inflation?

Until recently, the headlines of the articles flashed due to the high inflation in Lithuania, which reached over 18%. Everyone probably understands that high inflation is nothing to be happy about, but does everyone really understand what inflation is? And how is it formed?

 

What is inflation?

In general terms, inflation is the depreciation of money, where we can buy fewer and fewer products or services for the same amount of money over time because their prices have increased. In another way, inflation is a price increase, which is calculated and expressed as a percentage. For example, 5 years ago, for 30 euros. you could load a full basket of food products, and if you spend 30 euros this year and buy the same goods, this amount will not be enough for the whole basket, and to buy all these goods, you would have to pay 40 euros. in this particular case, the percentage expression of inflation per year would be about 6.7%.

 

How does inflation occur?

There are many reasons for inflation. In general, inflation is caused by higher costs of production, when it becomes more expensive for businesses to produce goods than before. There can be many reasons for this: the price of raw materials has increased, the salaries of employees have increased, or in other cases, when for some reason the demand for products or services increases - when sellers do not have time to produce and satisfy the customer's needs. Inflation is a normal indicator of a healthy economy and although there are different types of inflation, inflation in one form or another will not disappear anywhere and will always exist in the country's economy.

 

 

Inflation and types of inflation

 

When we have better understood and answered the question, what is inflation? It should be understood that there is more than one type of inflation. The main ones are:

1. Creeping – This type of inflation occurs when prices rise slowly but steadily over a relatively long period of time. Usually, during this inflation, the prices of goods and services increase by about 3-10%;
2. Leaping - this type of inflation, in contrast to creeping, occurs suddenly - prices rise quickly, in so-called jumps. When this type of inflation occurs, prices can increase by 25-30% per year.
3. Hyperinflation – This type of inflation is characterized by an even greater rate, with price increases of around 50% per year.
4. Deflation is a completely opposite phenomenon, because the prices of goods and services do not rise, but fall (decrease). At first glance, one could be happy about this phenomenon, but if we dig deeper, we will understand that this phenomenon is not so positive. When prices fall, businesses receive less income, so the share of taxes they pay to the state decreases, and even though they receive less income, debts and assumed obligations do not disappear anywhere - businesses have to pay salaries, invest in business development, etc. Therefore, prolonged deflation can lead businesses to difficulties, and later to bankruptcy, which can then mean an economic crisis prevailing in the country.

Ways to protect against inflation:

Although it is impossible to eliminate inflation, we can protect ourselves from inflation or at least reduce its impact on our lives and our savings.

1. It is possible to invest in real estate and since the price of real estate, as we can see from a historical perspective, is constantly rising, this could be one way to reduce the impact of inflation;
2. Investing in gold and art is a great long-term hedge against inflation if you don't want to or can't invest in real estate. It is always good to spread your investments across different investment instruments;
3. It is also possible to invest in the financial markets - shares of companies, if the company is successful and shows good results, the value of your shares will increase and you will be able to earn more, but you will also face a higher investment risk, because the value of the shares may fall.
4. With inflation in Lithuania reaching long-seen highs, investing through crowdfunding platforms in loans with real estate collateral is becoming more and more popular, as it is a convenient and easy way to invest that does not take a lot of time.

 

 

 

The effect of inflation

Inflation affects not only the country's economy, prices but also our savings and the value of the money we have. For example, if we set aside 10,000 euros and keep them in a sock, after ten years with 7% (currently inflation in Lithuania is 7.4%), the value of our savings will reach 4,839 euros, so in 10 years inflation will reduce our savings by 51.61%. which means that even though we saved, we will be able to buy even less in the future than we can now. Therefore, it is very important to take care of your finances, be interested in the country's economy and employ your money.

 

How to protect against inflation?

One of the first steps to protect your savings is a better understanding and interest in the economy, without knowing what inflation is, it can be difficult to start managing your savings and protect them from the effects of inflation. The main way to protect yourself from inflation is to employ money, so that the money you have and keep does not sit idle, because in order to maintain the value of savings, you need money to earn money, so we will look at the main ways and answer the question: where to invest money?

 

Investments in real estate

Investments in real estate - this investment method is the most common in Lithuania. Real estate investing involves buying an apartment, house, garage, or other real estate property and renting it out or reselling it for more than what you paid to buy it. This kind of method is quite liked by the country's residents because they think that they understand real estate, they can touch it, go and see it, so it seems to be a safer and more reliable way to invest. And this is not a bad option to protect against inflation, because real estate prices are constantly rising, so although it is not possible to predict the future, it can be expected that real estate prices will continue to rise, and if necessary, it will be possible to increase the rent and thus earn more, or if the value of the apartment rises, it to sell The main disadvantages of this investment are that you need to have a lot of capital and devote time to it, delving into the market and finding both the real estate object and tenants.

 

 

Other investments

Aside from investing in real estate, there are more ways to put your money to work to protect against inflation. Some of them:

Investments in gold, works of art

People have been investing in gold for a very long time, as this precious metal is traded all over the world. During the years of greater upheavals, gold helped to preserve at least part of their savings, as it is a global currency that is recognized by almost the entire world. You can invest in gold in different ways: in bars, coins, or other products. Although the price of gold depends on inflation and global economic phenomena, its price is usually proportional to inflation, which means that the higher the inflation, the higher the price of gold. Investors usually have at least several investment instruments and one of them is gold, because the value of gold reacts and depends on other things than stocks and bonds, this instrument becomes an excellent tool to diversify (break up) your investments, thus protecting them even more from risks.

 

 

 

Another way to protect your savings is to invest in artwork. This area of investing requires an interest in art to be able to buy a piece that will increase in value in the future, but such an investment will not only protect your savings over time but also decorate your home with a piece of art by a famous artist.

 

 

Investments in financial markets

And where to invest money for those who want riskier investments and want to spend more time investing and at the same time earn more? It is worth looking into the financial markets, and especially stocks, as this will allow you to invest in the shares of certain companies that you like. This type of investment allows you to expect a higher return because everything depends on the results of your chosen corporation, so if the company is profitable and pleases its shareholders with its results, then such results of the company will be noticed in the stock market and the value of this company's shares will increase. But just as the value of a stock can go up, it can also go down. When a company is not doing well, its profits are not increasing but decreasing, this can lead to a depreciation of the stock, which can lead to a loss of funds. Therefore, investing in shares is considered one of the riskier ways to hedge against inflation.

 

 

Crowdfunding of real estate

This investment method is becoming more and more popular in Lithuania, as one of the most popular ways to protect against inflation, because on crowdfunding platforms you can invest simply, online, from just 100 euros, and get an annual return of 7 to 14%. On such platforms, investors lend their funds to real estate developers, who use the collected money to implement their business plans and pay investors interest on the collected funds. The main advantages of this investment method are that it is possible to invest in small amounts, you do not need to be a market expert, because the platform teams do the project analysis for you and everything can be done easily online. This investment has more advantages - you can choose different projects in which you want to invest, so you can divide your investments, and you can choose slightly riskier projects and thus earn more.

 

 

 

Benefits of inflation protection

It is necessary to protect yourself from inflation because this is the only way you will be able to enjoy your savings in the future and not reduce the quality and comfort of your life. Investing is one way to protect your funds and the value of the money you have from depreciation because you are putting your money to work and over time the money you invest earns even more money, so these savings of yours will retain their value over time.

We hope that after reading this post, you have a clearer understanding of what inflation is, what types it is, and how to protect yourself from it, and you will be able to choose the most suitable investment method that will help you reduce the impact of inflation on your savings.