Inflation with no prospect of improvement: what you can do now

In November 2021, the inflation rate in the Federal Republic of Germany reached 5.2%, which is quite high compared to previous years. In the past, the inflation rate was quite low: only 0.5%. However, the European Central Bank is targeting an annual inflation rate of two percent, which is an appropriate target.

From bread in the supermarket to fuel at the gas station: everything is more expensive. The reason for the increase in prices is the so-called rate of inflation. If this rate of inflation increases, it affects everyone, first of all the wallet and the bank account.

Cryptocurrencies such as Bitcoin as a means of payment, despite their risks, also offer many advantages, in addition to not being vulnerable to inflation. These virtual currencies are now accepted even in crypto casinos, which means that the “new money” is becoming more and more accepted.

What exactly inflation means and how you can protect your money from it

Next, we add some important data on this topic.

The essential data:

  • Inflation means that the value of money decreases.
  • Generally, the desire of central banks is that inflation does not exceed two percent.
  • With the aforementioned rate of 5.2%, it is reflected considerably in the price increase.
  • To protect money from inflation, it is advisable to invest it.

100 euros is 100 euros, you can’t argue. But what you can buy with this amount changes over time. Because the value of money decreases every year. The term that refers to this loss of purchasing power is known as “inflation”.

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Inflation is currently rising

Most people associate the term inflation with rising prices. In fact, the inflation rate increased considerably in the last months of 2021: standing at 5.2%.

In 2020, inflation was much lower: it was around 0.5%, the lowest value since the 2009 crisis. The causes were the effects of the COVID-19 pandemic. Thus, added to other factors, the temporary VAT reduction contributed to curbing the increase in the inflation rate, mainly in the second half of 2020.

An inflation rate of more than two percent is not a situation that should be accepted so easily. On the other hand, it is a sign that the growth of the economy is scarce. Experts believe that the current rather high rate of inflation is temporary. Looking ahead, they expect an inflation rate closer to the ECB’s target of two percent.

A slowly rising inflation rate ensures stable price developments

Consumers naturally want stable prices. Be it for daily food, fuel or building materials. Those who know the prices can plan well ahead financially.

First of all, when it comes to construction projects or other financial projects, unexpected price increases can very quickly lead to unpleasant surprises.

The European Central Bank carefully monitors inflation. The reason is that an inflation rate of two percent reflects continued growth. This encourages both the public and the economy to make purchases and investments as soon as possible instead of postponing them. At the same time, the increasing rate of inflation guarantees a stable and predictable evolution of prices.

Inflation costs money, albeit in a scary way

For everyday purchases or when planning a property, stable prices are an advantage. However, that stability becomes problematic when it comes to investing capital.

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After all, these investments are supposed to increase in value and not stay the same or even decrease. Although two percent less purchasing power in a year does not really make a big difference, if you calculate it over a period of ten or twenty years, the difference is very considerable.

Let’s do an example calculation to check it: In real terms, 100 euros have lost almost a fifth of their purchasing power in eleven years, that is, 20%. So after this period, with those €100 you can buy 20% less than eleven years ago.

Those who rely on fixed-term deposits fall into the real interest rate trap

Another difficulty for savers is the so-called real interest rate trap. This mainly causes difficulties in case of high inflation. This is because investors currently only receive little or no interest on many investment products.

Most banks now charge negative interest on money deposited. The amount of money from which this penalty interest rate is applied varies from one bank to another. Many banks apply this negative interest to deposits of 50,000 euros or more.

If the money is in the account without interest, or if negative interest is paid on the principal saved and inflation is higher, investors are hit hard.

Inflation can be resisted

Parking the money in a savings book, in a sight account or in a fixed-term deposit is not a recommended option in the context of a high rate of inflation and the current environment of low interest rates.

A justified way to counteract inflation is to invest capital with the possibility of return. There is no exact form of investment, you have to analyze which one suits you based on your financial situation, your life circumstances and your savings goals.

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A proven investment option is, for example, the purchase of real estate. Real estate prices are currently quite high; however, with professional advice, you could earn a return that exceeds the rate of inflation after a few years. This is due to additional rental income and increased property value.

Another promising way to invest your money is in securities. In this case, equity funds may be of interest. These spread the unavoidable risk as widely as possible and promise a good return.

You also have to keep in mind how important it is to invest for the long term. Equity funds are affected by many cyclical fluctuations, which can be balanced out over as long an investment period as possible, ten or twenty years

In addition, you benefit from the so-called “compound interest effect”. In this way, you not only protect your money from inflation, but also earn a return. And who wouldn’t want to increase their capital accordingly? If you take into account all the factors that influence and proceed with due caution, the chances of success are not so small.

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