What should you know?
Inflation is the word used to describe the increase in prices across an economy over time.
It is commonly known as the ‘invisible enemy’ due to the fact it silently eats away at the value of your money over time.
Inflation has been the topic of many headlines over the past few years. After a couple of decades of fairly moderate inflation, we saw the sudden onset of elevated price rises across the world.
This steep increase in our cost of living has been a rude awakening to the destructive power of inflation and why we must protect our hard-earned savings from its ravaging effects.
This chart shows how the buying power of US$100 has been eroded over the past 50 years:
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- US annual inflation has averaged 3.92% since 1973.
- As a result, US$100 from 50 years ago is now only worth US$13.70 in real terms.
- Put another way, you now need US$685 to buy what cost US$100 in 1973.
- Over the same period, an investment of US$100 in the S&P 500 index grew to US$14,441, equivalent to US$2,008 in 1973.
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Understanding and planning for inflation is crucial to protecting your standard of living. Not doing so means you will have less money tomorrow than you do today.
If your savings don’t keep pace with inflation, you will not be able to afford the same things in the future as you can today. This has dangerous implications for your ‘future self’ if you don’t plan ahead.
Global stock markets have proven to consistently outpace inflation over the long term. History being our guide, investing in a global equity portfolio is the best way to preserve the buying power of your money and guard against the dangers of inflation.
