What you need to know about purchasing power

The cost of living has grown exponentially in the last few years, so what does that mean for purchasing power and safeguarding your finances?

Inflation is currently sitting at unprecedentedly high levels following a series of events that have impacted the economy over the last two decades. The Coronavirus pandemic, along with issues like unemployment and national debt have culminated in the increase which is now ultimately affecting the cost of living.

This guide will help you understand the basics of purchasing power and the domino effect it can have on your finances, as well as some ways you can combat these effects. Of course, we’re not offering any financial advice, this resource should be used for guidance and reference purposes only, and any specific advice should be sought through a qualified financial advisor.

What is Purchasing Power?

To understand purchasing power, we first need to understand what inflation is and how it can affect the value of an investment.

So, what is inflation?

Inflation is the measure of how prices for goods and services increase over time.

Meanwhile, purchasing power is essentially the opposite of inflation, since it measures the value of a currency by the number of goods and services it can pay for. The amount of purchasing power that a currency holds is linked to factors like inflation, industry, and wages.

Generally, inflation continues to increase as purchasing power decreases. This means that, over time, our currency can become less valuable or useful.

How has it changed over time?

The purchasing power of the dollar has changed over the years due to certain historical events such as the 2008 financial crisis. But what impact has this had on the purchasing power of the dollar?

Since the increase in inflation and decrease in purchasing power are linked, this means that it now takes more units of currency to acquire the same amount of goods. For example, if a basket of groceries totaled $100 in 1999 when inflation was 2.21%, that same basket would ring up to a total of $177.77 today with an inflation rate of 8.26% in comparison to the previous year.

The US Bureau of Labor Statistics measures and monitors data on purchasing power because the consequences of its decrease can affect so many aspects of a country’s economy. To do this, they produce the Consumer Price Index (CPI) which measures average changes over time in the prices paid by consumers for the most popular goods and services, including fuel and food.

The dollar has been steadily decreasing in value for the most part, with inflation for food up by 11.4% and energy up by nearly 24% in the previous 12 months (correct as of September 2022). Current inflation rates sit around 8.5% which is nearly three times higher than the average rate throughout the Great Recession in 2008 – leaving purchasing power to fall lower than it has for decades.

Ways to Protect Your Finances Against Purchasing Power

One of the best ways to protect your money is by diversifying your savings portfolio. If you’ve invested in something that increases in value by 3% a year but inflation is 4%, you’ll end up seeing a -1% decrease in the value of that investment. Seeing different inflation rates before committing to fixed-term savings of any kind is important to ensure you’ve considered how inflation might be affecting your money.

As a suggestion here are some of what many consider to be the best investments to protect your finances from the impact of purchasing power:

Gold

Gold is one of the most reliable and popular inflation hedge investments. The value tends to outperform or keep pace with the inflation rate, meaning that the risk of value loss is lower compared to fiat money.

Money invested into gold is more likely to retain its value over time and resist the effects of economic shock and uncertainty since it isn’t linked to any physical currency.

Commodities

Inflation is driven by the rising cost of goods and services compared to purchasing power, so many choose to invest in those commodities.

As inflation increases, the value of these commodities and the share prices of the companies providing them is also going up. Providing you choose the appropriate goods and services to invest in, you may see your investments grow over time with inflation – meaning you’ve successfully managed to hedge against it.

Real estate

Property prices generally increase alongside inflation, which means that buying or investing in real estate can help combat the economic decline we are currently experiencing.

You can take a hands-on approach by becoming a landlord or take a back seat by investing through trusts and funds without any long-term commitment.

Hedging against inflation using these assets may help you safeguard and protect your money.

Understanding Gold’s Purchasing Power

Gold can help provide more of a constant hold of value that can provide a reliable hedge against inflation and uncertainty.

Although it does fluctuate and sometimes falls out of line with inflation, gold has proven, overall, one of the most dependable forms of currency. It generally outperforms or keeps pace with inflation rates, making it a much lower-risk asset than cash, which can be less reliable due to being linked to inflation.

Gold isn’t linked to a currency or Government. Instead, it serves as a commodity that can be bought through trusted services. Therefore, the purchasing power of gold is generally higher since it doesn’t have the influence of inflation to contend with. Glint has given unprecedented liquidity to gold, enabling its clients to use real, allocated gold digitally, as everyday money in electronic payments, to be used in-store or online.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto, and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk-free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline. 

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