By Lewis J. Altfest
Ah, fear of the inflation monster! Linked to the skepticism many people have about the country and the stock market, the prevailing belief is that U.S. inflation will rise imminently and help undermine our economic recovery. Do we really have to worry about an “inflation monster” who resembles the “cookie monster,” but who devours savings instead of cookies?
By Ekta Patel
Inflation is inevitable. At least that’s what investors think when they see prices slowly rising and the fear of above-average inflation begins to take over the financial media. Bond holders are likely to cringe at the thought as their investments are tied up in fixed- rate instruments while comparable bonds begin to sell at higher yields.
What is it that makes inflation a concern for investors? Rising inflation increases the return required from investors. In a simple example, if you thought prices would increase 2% next year, at the very least you would want your money back adjusted for this increase. If inflation is 2%, without accounting for the risk of not returning the money or alternative investments, I would lend you $100 if you promised to give me back $102 at a future date. If inflation expectations increased to 3%, I would want back at least $103. However, if I had loaned my $100 to you before inflation rose, I would be stuck receiving less money than if I were to lend it out today. Therefore, my loan to you declines in value.
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