Inflation Forecast

Inflation

We all know that inflation in simple terms means 'a general rise in prices'. When prices of goods and services are on average rising, inflation is positive. Note that this does not mean that all prices are rising, or that they are all rising at the same rate. In fact, if enough prices fall, the average may fall too, resulting in negative inflation, which is also known as deflation.At the extreme, inflation can turn into hyper-inflation. When inflation starts to rise at rates of 100%, 1,000% or 10,000%, people rush to spend money before it becomes worthless.

Risks associated with Inflation 

Inflation is considered as a big risk to your money. When the  supply remains relatively constant and the financial demand goes up, then we see prices go up and call this as an inflation. But when we talk about recent COVID-19 economic shutdown, there has been a massive drop in demand because of the shutdown which has led the whole world to a situation called deflation. And deflation is exactly what the government always tries to avoid.

• The rising inflation means that the interest payments have less and less purchasing power.
• Hyper-inflation, a situation where there is the risk that inflation will be higher than expected. It's a reason that investors and analysts hypothesise considerably about inflation rates and make an study about indicators such as the yield curve in order to understand and get a feel for where inflation rates are headed. Ex: many economists believe that a steep normal yield curve means investors expect higher future inflation and a sharply inverted yield curve means investors expect lower inflation.
• Inflation causes money to lose value, and any investment that involves cash flows over time is exposed to this inflation risk.

Inflation risk is real while many people underestimate it and I believe it's a very significant responsibility for everyone to be able to identify and manage financial risks as there are many steps/techniques that can be followed to help manage the risk while inflation tends to devalue your money over time.

Opportunities from Inflation

We can find lots more opportunities from Inflation. Some examples relating to it are shown below:

• For real estates, rising prices increase the resale value of the property over time, but because real estate can also be used to generate rental income. Just as the value of the property rises with inflation, the amount tenants pay in rent can increase over time. These increases let the owner generate income through an investment property and helps them keep pace with the general rise in prices across the economy.

• Stocks have a reasonable chance of keeping pace with inflation—but when it comes to doing so, not all equities are created equal. For example, high-dividend-paying stocks tend to get hammered—like fixed-rate bonds—in inflationary times. Investors should focus on companies that can pass their rising product costs to customers, such as those in the consumer staples sector.