Saving In Times of High Inflation

These past two years, the economy has been beset by many problems: the US has experienced a credit crisis that hurt many financial institutions, the real estate market is struggling, fuel is in scarce supply, driving up prices, and unemployment is on the rise. However, possibly the biggest economic threat facing the US right now is inflation.

Inflation rates have been getting higher and higher, and the value of the dollar on foreign exchange markets keeps falling. Because of the looming threat of out-of-control inflation, the Federal Reserve has refused to cut interest rates, despite the possibility of economic slowdown. The Fed has even considered raising interest rates, in hopes of curbing the falling value of American currency. The rate of inflation for this year has exceeded analysts’ expectation.

Across the board, the price of all US consumer goods has increased by an average of 4% this year. Throughout the early 2000’s and late 1990’s, the price of consumer goods has been increasing by about 2-3% every year. In short, in the middle of 2008, inflation is a significant factor to take into account when undertaking any sort of financial planning.

The threat of inflation should change the way you plan your finances. First of all, now is not a good time to start saving money. Stay away from low-interest, guaranteed-yield investments for your money, especially for the long term. Right now, a typical interest rate on a certificate of deposit for one year, for example, is about 2%. If the annual inflation rate right now is almost 4%, you’ll be losing instead of gaining money. If you are going to buy securities, don’t hold on to them for too long–make sure to collect before inflation catches up with you.

In this light, instead of saving, you might be tempted to spend your money right away–on actual products. After all, inflation is relative: it is a matter of actual goods being “worth” more as much as it is of money being “worth” less. Gold and jewelry have historically been popular ways to save up wealth when when the value of currency decreases.

This is a valid line of thinking, to a point. Those who spend everything on commodities in an attempt to preserve their wealth fail to take one fact into account: although they are somewhat less unstable than currency, material goods do not have intrinsically unchanging value.

The value of something is only what people are willing to pay for it. Speculators are more likely to value commodities highly now, since other investments (securities, etc) are losing value. Yet, commodities are part of a market too, and like any good sold on the market its value is subject to fluctuations. Certain commodities, such as oil, are estimated so highly right now that it could be risky to buy them.

The best way to save money in times of inflation may be, paradoxically, through debt. Now the best time to borrow money to make major purchases that you need–a home, a car. Alternately, now is the time to refinance and consolidate any debts you may already have. Why? Times of high inflation are the best times to take out fixed-rate loans. With a fixed-rate loan, you’ll be paying the same amount of money now as later on down the line–even though that money is worth less now, due to inflation.

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