Tuesday, March 13, 2007

Inflation is A Slow Killer

Inflation is a state of persistent increase in the prices of goods and services. In general, it happens when there is too much money chasing very few goods. Let’s take gasoline as an example. In 7 years ago, it takes $40 to pump my car tank until full but now it takes $80 which 100% increase, approximately having 14% inflation rate for gasoline. When inflation happens, there is a loss in purchasing power as your money now buys fewer things. Therefore, it is clear that a high rate of inflation can be disastrous to any country. Having said so, this normally does not happen overnight because inflation is a slow killer, treating quietly in the background. The sad thing is when we realize it is a killer, it is already too late.

As investors, we need to realize that inflation is here to stay. We can either let it kill us slowly or we can use it to our advantage. If we keep our money in cash form (e.g. saving account, current account), that is it and you’re gone. Unless your saving account or current account has the interest of higher than inflation, then you still can survive. But most likely this is not the case. To benefit, we must place our funds in places, namely the stock market and properties that will outperform the inflation rate. This is critical particularly in periods of high inflation where money loses its value faster than a leaking bucket.


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