The decrease in buying capacity is called inflation. For example if the currency is devalued and the goods prices remain the same then there is a net increase in inflation. Similarly if there is an increase in prices of the products which we buy, even if the currency value is stable; we are suffering from inflation.

The effects of inflation are obviously drastic. As a result people tend to change their priorities in investments. In this context awareness is pretty necessary for people to counter inflation. Below is a compilation of some information resources and suggestions which you can use for your benefit.

Inflation Accounting

Companies should be showing the constant dollar pricing and current cost and prices in their annual financial reports. The inflation causes the capital to wear out and shows unrealistic profits. This in turn is an illusion. Therefore the financial reports must add “constant dollar” i.e. the fluctuations in the value of the dollar in different periods due to different economic scenarios.

A Realistic Balance Sheet

The prices shown in the balance sheets for fixed assets; inventory etc. can also be a fallacy. The prices in dollars at the time when these assets were bought are way higher than today. This is because today those items can not be bought at that price. There fore those assets should be assessed in current market scenario.The policy of last in first out is some what erroneous in accounting terms as you get a decremented value of your assets and an overstated value of cost of your products. Average cost method and first in first out methods show you a more realistic picture.

Trends in the Market

The bulk prices and unit prices have always been an indicator of judging inflation for financial analysts. The Produce Price Index and the Consumer Price Index are a parameter unit and bulk sale inflation respectively.  Investors should not panic upon watching one or two values from the market. Rather, a larger collection of data regarding these indexes can help you judge whether the inflation is rising at a higher rate or not.

Stock Investors

Stock investors usually do watch out for interest rates. The rise in the interest rates as a result of inflation is usually not liked by the stock investors.  Therefore a stock investor must invest at the times of moderate inflation rates.

This can be explained as with a rise in inflation the federal open market committee increases the interest rates so that the investor gets reluctant to borrow money and which results in slowness in the economic growth.

Hazards of Defensive Approach

Stocks, although more risky, are a better answer to inflation than bonds. Apparently the fixed income investments are a satisfactory commodity but with the passage of time the inflation reduces the purchasing power of the investor. Therefore while investing you need to take the additional factor of inflation into account. No one can guarantee what the future holds in terms of inflation news.

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