Fighting High Inflation Rates, Strategies to Fight Rising Inflation

Tuesday, August 19, 2008

Fighting High Inflation Rates

Generally inflation is characterized by increasing commodity and service prices, decreasing total portfolio value and weakening national currency. One can follow different strategies to overcome inflation. Some of those strategies to fighting high inflation rates are noted here.

Paying back high-cost loans - When inflation is high no investing option can guarantee greater return than loan interest payment. So prepaying loans (especially floating rate loans) is the better option.
Avoiding purchases based on loans.
Avoid large savings bank account balances and avoid keeping large amount of idle money in hand.
Creating an emergency fund – Living and healthcare expenses are pretty high in inflation. Make sure that your emergency fund covers at least 3 months of your expenses. Investing in short-term debt funds is a good option.
Diversifying investments – Investing in emerging and well performing international economies is a good option. Investing in gold and similar precious metals is one another option.
Investing in stocks with long-term profit goals – There are stocks of many companies which are least affected by high inflation or even benefited by it. Also stock prices can be at their bottoms. Avoid stocks which are sensitive to interest-rate changes.
Go for capital gains and dividends – tax rates can be higher and interest incomes are taxed more. Long-term capital gains and dividends are taxed less or not taxed at all.