Inflation & Purchasing power

The purchasing power or buying power of a currency is the quantity of goods and services that can be bought with one unit of money. A higher purchasing power means a person can afford more things with the money that they have.

Purchasing power affects a country's economic prosperity and serves as an indicator of current market conditions as it allows a business or individual to discern the value of their earnings.

Conversely, inflation diminishes the value of your money, over time. Inflation is the decline in the value of money, due to persistent increase in the price of goods and services. An increase in inflation erodes the value of your cash. If for example, one (1) unit of your currency could buy ten (10) units of an item last week and today it can only buy five (5) units of that item, it means that there has been a 50% inflation in the one (1) week period.

Investing helps you store the value of your money thereby retaining your purchasing power. Rather than holding cash whose value can be negatively affected over time by inflation, it is beneficial to invest. Investments ensure that your money does not feel the full effect of inflation and your purchasing power does not diminish. By investing, you can earn percentages of your money, and retain your purchasing power.

Various types of inflation offer various levels of earnings/returns. Some investments have historically been known to be a good inflation hedge because the factors that impact their prices and your returns on those investments tend to be positively correlated with inflation., for example, as inflation rises so do property prices & rent and consequently earnings on a real estate investment or rental yield. Investments such as mutual funds also afford you earnings/returns that may allow you to catch up with inflation rates and ensure that the value of your money is not lost.

It is therefore important to build an investment portfolio of assets that will help maximise returns in the face of inflation over any given period. To ensure you have a good mix, you should be aware of your risk profile and the kinds of risks you are willing to take. To begin your investment journey, please send us an email us at clientservices@axamansard.co