Due to the high inflation rate, the cost of living in the United States has become more expensive than ever. So, how are you supposed to pay for your car, bills, weddings and other events? Well, entrepreneurship is the only solution to beating inflation. This article addresses the causes of inflation, beating inflation investing tactics and the impact of inflation on business.
What is inflation?
Inflation is the long term increase in prices of services and goods due to the devaluation of currency. Even though inflation is a bad thing, it might be a good thing to entrepreneurs. Usually, high inflation rate problems arise when the unexpected increase occurs. If incomes don’t increase as the inflation increases, everyone’s purchasing power will be effectively reduced which in turn leads to a stagnant or slow economy.
Major causes of inflation
This is the primary cause of inflation. If the money supply outpaces the economic growth rate, inflation will occur.
Everyone knows that national debt is a bad thing. However, did you know that, over time, it can cause high inflation rates? If the national debt increases, the country has two options; raise taxes or print more money to pay off the debt. If taxes are increased, businesses will react by increasing prices in goods and services. The latter will automatically lead to an increase in inflation as discussed above.
If a country increases the exposure to foreign marketplaces, its inflation will become worse.
This is an economy theory that tries to explain what drives up the prices of consumer goods and services. This theory states that when companies faced with increased input costs like raw materials, they will retain their profitability by passing this increased cost of production onto consumers in the form of higher prices.
Impact of inflation on business
A small increase in inflation can hurt the capital expenditure and increase the cost of production in a company. However, when controlled, inflation can act as a healthy stimulus for the economy. Larger corporations can handle the effects of inflation while small firms often take a direct hit. High inflation rates can also have an adverse impact on currency exchange rates which will eventually result in an export slump.
How to defeat inflation
To entrepreneurs, beating inflation is very easy. If inflation stays for a longer period than expected in the market, you are more likely to notice it. If you didn’t plan for it, you might realise that your savings aren’t enough to enable you to reach your goals. This is how you beat inflation:
Stay in the market
Staying invested in the market increases your potential returns which increase your chances of beating inflation. Individual investors are more likely to increase profits by sticking to a passive investment strategy. If you attempt to cut down your losses, you might find yourself with much lower returns than those you would have had if you had stayed in the market.
Invest in equities or equity mutual fund
The best way to stay one step ahead of inflation is investing in assets over a long period. You can also lower the overall risk by investing through systematic investment plans or SIPs.
Go for assets like Gold and Real Estate
Gold is considered to be the perfect hedge against inflation. However, market experts say that real estate can be an alternative option if one can afford to spend a huge amount of money.
Is high inflation good for entrepreneurs and small businesses?
Interest rates will never remain low forever. This is what small businesses and entrepreneurs fear most. If the interest rates increase, small businesses will require more funds to produce goods and services. However, rising interest rates can be a good thing to entrepreneurs and here’s how:
More funding options
Low-interest rates tend to tie lenders hands. Without much spread (the difference between loans and interest rates), most banks and lenders become less willing to take riskier loans. On the other hand, high-interest rates encourage banks to give loans to small businesses.
The chance to increase prices
When inflation is small, there’s a lot of capital. However, if it increases, production costs increases, and this gives entrepreneurs an opportunity to raise prices for their goods and services.
Beating inflation is not that challenging to entrepreneurs. With the best tools at hand, you can use investing to beat high inflation rates.
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