How inflation affects your purchasing power and investments

Inflation is one of the most important phenomena in the economy, affecting all aspects of a person's financial life.

When prices rise across the board, purchasing power is impacted, and the ability to make long-term investments may be reduced.

In this text, we will explore in detail how inflation affects your purchasing power and what strategies can be adopted to minimize the impacts on your investments and your day-to-day financial life.

What is inflation and how does it impact consumption?

Inflation is defined as the continuous and widespread increase in the prices of goods and services in an economy.

This phenomenon is measured by price indexes, such as the IPCA (Broad Consumer Price Index) in Brazil, which calculates the variation in costs of a basket of products and services consumed by the population.

However, when inflation is high, the cost of living goes up, which means that money loses value over time.

In everyday life, however, the impact is immediate: the money you have on hand buys less.

For example, a salary of R$2,000.00 may, in a year of high inflation, be enough to pay fewer bills and purchase fewer products than in the previous year.

Unfortunately, this forces people to make difficult financial decisions, such as cutting back on non-essential items or seeking more cost-effective alternatives.

According to data from Central Bank of Brazil, accumulated inflation over the last three years has varied considerably, reaching a peak in 2021.

This variation drastically impacts purchasing power, especially among low and middle-income families.

The relationship between inflation and purchasing power

A inflation affects your purchasing power in a direct and perceptible way.

As prices rise at a rapid pace, wages or salaries fixed income that you receive becomes insufficient to maintain the same consumption pattern.

As a result, families need to adjust their budgets, opting for cheaper products, reducing leisure and the consumption of superfluous items.

The food sector is one of the most sensitive to inflationary variations.

With the increase in the cost of inputs and transportation, the prices of basic foods, such as rice, beans and meat, rise significantly, impacting the household budget.

Furthermore, transport and energy are also heavily affected areas, as these sectors have their prices regulated by macroeconomic and global supply factors, such as the price of oil and energy costs.

Another important point is the relationship between inflation and debt. When inflation is high, interest rates tend to rise, which makes credit more expensive.

Therefore, this directly affects those who need to finance purchases of durable goods, such as cars and household appliances, or even those who depend on loans to make ends meet.

In many cases, debts increase while salaries remain stagnant, creating a financial snowball effect.

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What is the impact of inflation on investments?

In addition to affecting consumption, inflation affects your purchasing power also in terms of investments.

One of the biggest mistakes many investors make is ignoring the impact of inflation on the real return on their assets.

Investments that appear profitable at first glance, such as savings, may actually be losing value in real terms if the return is lower than the inflation rate.

For example, if an investment yields 5% per year, but inflation in the same period is 6%, the investor, in practice, loses purchasing power.

This is because the value he can acquire with the money invested decreases over time.

For this reason, it is essential to choose investments that outperform inflation or that, at the very least, guarantee a return adjusted to it.

Investments linked to the IPCA, such as the Treasury IPCA, are a good option for protecting assets against inflation.

These bonds offer a fixed return, in addition to guaranteeing correction for inflation, which preserves the investor's purchasing power.

Furthermore, equity and real estate funds can be effective alternatives, as they have the potential to grow above inflation in the long term.

Inflation protection strategies

The best way to deal with inflation is to adopt a protection strategy, both in your consumption and in your investments.

Diversification is the key word for those who want to ensure the preservation of purchasing power over time.

In addition to investing in bonds that protect against inflation, such as the Treasury IPCA, consider allocating resources to assets that may appreciate in periods of high inflation.

An example of this is investment in real estate, which tends to increase in value with inflation, as the sale price and rents also rise.

Another important point is to invest in shares of companies that have the capacity to pass on increased costs to the consumer, such as energy, food and commodities companies.

These sectors generally benefit in periods of high inflation.

Below are some of the top strategies for protecting your money:

1. IPCA Treasury: Ideal for those seeking a safe return, protected against inflation.
2. Real Estate: Assets that tend to appreciate in inflationary scenarios.
3. Multimarket Funds: They offer diversification and flexibility, allowing rapid adjustments based on inflation.

How Inflation Affects Your Retirement Planning

The impact of inflation also extends to long-term planning, such as retirement.

When the inflation affects your purchasing power, it compromises the financial reserves accumulated for this phase of life.

If your savings are not adequately protected against inflation, the amount you thought would be enough to ensure a comfortable retirement may become insufficient.

Many retirement plans are not adjusted for inflation, which causes the accumulated amount to lose value over time.

An efficient solution is to opt for private pension plans linked to the IPCA or invest in assets that offer protection against inflation, such as dividend stocks and real estate funds.

Conclusion

Understand how the inflation affects your purchasing power It is essential to keep your personal finances under control and ensure the preservation of your assets.

Inflation, although an inevitable phenomenon, can be mitigated through smart consumption and investment strategies.

As economist John Maynard Keynes said: "Inflation is like a disease: if left unchecked, it can destroy an economy."

It is everyone's responsibility to protect themselves against this economic "disease" by adopting practices that maintain the value of money and ensure financial stability.

By applying the right strategies and monitoring market behavior, you can protect your purchasing power and ensure that your investments continue to grow, even in high inflation scenarios.