I’m certain if you watch any news coverage you have heard about inflation. But you might not know what inflation is all about or even how it affects your investments and your money in general. The truth is, inflation can do major damage to your money if you don’t take the proper steps needed.

In this post, I’ll show you how inflation harms your investments and the steps you can take to help protect yourself.

What Is Inflation?

Before we get to the steps to protect yourself, we first need to make sure we have a solid understanding of what inflation is.

Inflation is the increase in price of goods and services over time. For example, a gallon of milk costs $4 today. If inflation is 3%, then next year, that same gallon of milk is going to cost $4.12. Thus you need more money to buy the same goods and services.

Historically inflation averages around 3% per year. And while it rises and falls on its own, each nations central bank works to keep inflation in check. This is done for several reasons.

First, if it rises too quickly, called hyperinflation, the value of money drops dramatically. In other words, it becomes close to worthless. This is what happened in Zimbabwe in 2007.

For years, the government took farms away from some people and gave the land to others who has no business in farming. As a result, food production dropped drastically. Eventually, the entire economy was affected and hyperinflation took off.

By 2008, the value of $1 USD was worth $2,621,984,228 Zimbabwe dollars. While it might sound nice to go to Zimbabwe and be a millionaire with your US dollars, think about how difficult it would be to buy milk and bread because of the astronomical prices.

On the flip side of hyperinflation, there is deflation. Here, the cost of goods and services drops to a lower value. The best example here is with technology. When a new 4K television came out it was costing consumers over $5,000. Now you can get the same television for $1,500.