Inflation; how serious can it hit you?

What do you understand by the term inflation? Does it matters if the rate of inflation is high? What impact does it have to you and your financial goals? Does your financial planner consider about inflation when planning your financial plan? Does it pay to understand about inflation?

As a financial planner, I am always trying to plan my client’s financial goals and one of the factors that I think is important is inflation. Inflation is the rise of the future dollar compared to the present value. In short, your dollar today will be lesser compared to your dollar tomorrow. Just look at the price of one consumer product like rice, a packet of rice today cost more than 5 years ago.

When making an investment, rate of inflation is very important. Inflation is classified into 2 categories, anticipated and unanticipated. Economist can predict the inflation rate with a high degree of accuracy, this inflation is called anticipated inflation rate. What happens when there is an increase in the price level that comes in as a surprise? For instance, if the market participants anticipated a 3% inflation rate but the actual inflation rate turn out to be 10%; this will then be an unanticipated inflation rate. It will be impossible to make a prediction on the future values if the inflation rate is high and variable.

High and variable inflation rate will generate uncertainty and weaken the link between income and productive activity. Some of the effects are will definitely hit money lenders, distortion of prices resulting in wrong choices , when inflation takes hold, market begin to adapt and an allowance for inflation is generally built into the market interest rate and, for retirement planning, it will have an impact on the future values.

To hedge this problem, you will have to be kept aligned with the changes of the economic activities at least once a year. Having an annual review can help you avoid losses.