What Inflation Means, and How It’s Measured

Inflation is pretty simple. It’s the rate at which goods and services increase in value, and in turn, at which the dollar drops in value. For example, your Snickers now costs $2 instead of $1.50, which means your dollar buys less candy bar. Put in another way, your dollar has less value.

The US measures inflation using a metric called the Consumer Price Index, or CPI. The CPI takes a basket of goods and services and averages them out to give you a general idea of how prices are changing. When the CPI goes up, that means inflation is happening.

When inflation is up, we feel the strain. Our dollar buys less and is savings are worthless. That is why you need to invest in assets that hedge inflation.

If your savings plan is to simply to put money into your local bank savings account, you’re actually losing money in times of inflation, because inflation decreases the value of your dollar. The interest your savings are earning won’t be keeping up with inflation, so essentially each month your savings account will buy you less.

I can give you a great example of this. When my parents first got married my father bought a $10,000 life insurance policy for my mom. This was a lot of money back then and would have really helped her if something happened to him. The problem is he didn’t read the fine print that the policy did not increase with inflation and when he passed away a few years ago my mother only received $10,000. Luckily, her children are taking care of her, but that is a perfect example of inflation.

Real estate is a great investment that hedges inflation. Not only does the value of the property rise with inflation, but the amount of tenants pay in rent will follow inflation as well.  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. To learn more about how to invest in real estate during a downturn click here for access to my private Facebook group.