"Invest in inflation, it's the only thing going up"
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
As prices rise, a single unit of currency loses value as it buys fewer goods and services. This loss of purchasing power impacts the general cost of living for the common public which eventually leads to a deceleration in economic growth.
WHAT CAUSES INFLATION?
Inflation is usually a direct result of rising prices. This can be attributed to a number of different factors. The first being a shortage in the supply of goods or services, with the current supply being unable to cater to increasing demand. Higher labor costs also contribute to inflation leaving the end consumer with the burden of paying for this additional production expense. The higher cost for labor then creates a spiral effect and raises living standards for the average worker while simultaneously increasing the cost of living. This wage-price spiral repeats itself as one factor influences the other and vice-versa.
Economists also believe that sustained inflation occurs when a nation's money supply growth outpaces economic growth. In simple terms, this translates into higher asset prices as governments inject more money into the economy.
THE NEGATIVE EFFECTS OF INFLATION
To better understand the negative impact inflation has on our lives, let’s take a look at an example. Say you earn $1,000 per week working at XYZ corporation. Your living expenses consume about 75% of your salary and the remaining 25% goes into savings for retirement or towards your emergency fund. One day your boss informs you that you will be receiving a raise of 10%. From now on you will earn $1,100 per week for the same amount of work. With this extra $100 you can now afford to raise your living standard, buy that luxury piece of clothing, more expensive food, and maybe even move to a more attractive neighborhood. You see no reason not to enhance your lifestyle and thus, what you once considered a luxury becomes your new normal.
XYZ corporation must now find the money to pay that extra $100 to their employees. To do this, they must raise their prices, leaving their customers carrying the burden of your raise. While it may not seem like this affects you, this is happening all around us. Companies increase wages, subsequently prices rise and suddenly everything around you has become 10% more expensive. This means that with your $1,100 a week paycheck, you can now only afford to buy the same items that would have costed you $1,000 just a short time ago.
After some time, you are back where you started with 75% of your income going to cover your day-to-day expenses, only now, because of your higher living standard you must spend 80% of your income and only 20% can be saved for a rainy day.
Exactly one year later, your boss invites you into his office to notify you that as a valued employee they will again raise your wage by 10%. This time though, you understand that this doesn't benefit you at all, it is just another step on the inflation ladder. This spiral has been going on for decades and centuries. Prices escalate and incomes increase but in the broad scope of things everything has just stayed the same with the average family in no better financial position than they were 10 years earlier. In fact, they are often in a much worse position with their more expensive lifestyle consuming more of their income to pay for itself.
In an attempt to slow this dangerous pattern, the government decides it is time to issue more money to the people in order to assist with higher living costs. This acts as inflation on steroids, often accelerating the cycle instead of diminishing its effects. With more money in their pockets people now feel richer and are willing to pay more and with this dangerous supply-demand imbalance, prices skyrocket even further.
ASSETS = MAGNIFIED INFLATION
The same is true for asset prices such as real estate and commodities, only on a much bigger scale. A house that would have once sold for $100,000 is now selling for $200,000. This is due to the reasons mentioned above, both the disproportion in supply-demand and the rising incomes of the middle class.
In fact, as the price for products and services adjust slowly to changing monetary conditions due to plentiful supply of consumer goods from emerging markets, asset prices, on the other hand, react much faster since the supply of real estate and commodities cannot be easily expanded. This directly benefits the wealthy and those who own assets.
Despite of all these price increases, federal government economic experts often tell us that inflation is low, they are referring only to inflation with regards to the cost of goods and services. One of the reasons they are allowed to say this because the government mostly monitors inflation in consumer prices and not in asset prices. The consumer price index (CPI) is the pressure gauge the government watches to evaluate inflation but mostly takes into account only goods and services but ignores asset prices and several other components that would exacerbate the inflation issue. The true measure of inflation as it relates to asset prices is much higher than the CPI indicates and only those who own tangible assets are fortunate enough to profit.
SAVERS ARE LOSERS
And The Rich Get Richer
Because of this negative correlation between asset prices and consumer prices, the “savers are losers” motto has never been more accurate. According to the US Bureau of Labor Statistics an asset that would cost $1,000,000 in 1920 was worth more than $13,000,000 in 2020, that’s a rate of inflation over 1300%, and continues to grow at a fast pace with any pullbacks along the way, like the financial crisis of 2008, all but a blip on the long-term chart.
Simply put, inflation erodes the value of your cash holdings and reduces your purchasing power while tangible assets grow at an accelerated pace. The rich get richer, simply because they are the ones with assets while the middle class suffer from the economic effects of inflation. Using the example above, the purchasing power of your money eroded by more than 92% due to inflation.
Bridgehall Group is on a mission to change the negative effect that inflation has on your wealth. By allowing investors to participate in real estate investments that are positively affected by inflation, our goal is that you should be able to partake and profit from the inevitable wave of growth that tangible assets will experience over the coming years.