INFLATION AN INVISIBLE ENEMY!

It came into my attention that we should discuss a bit about an invisible element of our economy called inflation. Most of us we are currently experiencing painful bites of inflation due to the fact that our incomes are fixed(pegged to a certain rate per month) and not floating ones. One year ago one could buy 10Kg of sugar for TZS 15,000 at TZS 1500/Kg but with current prices(TZS 2000/Kg) one can only buy 7.5Kg for same TZS 15,000; inflation has taken away 2.5kgs! Same example can be discussed in terms of petroleum and diesel and you may be supprised how low your purchasing power has fallen. So this is what I want to discus with you as a potential investor. We better start bargaining from commodities point of view if we are to survive well in economies with high inflation. One year ago, would i have bargained to be paid 1000 liters of Petroleum per month my salary automatically would have moved from Tzs 1.5million to 2.2Million using current BP pump prices, I would just urge my employer to read the nearest pump price before paying me. Unfortunately, systems are set to profit from our utter ignorance,in hyper-inflated economies money does not make sense at all!

Inflation can simply be defined as the rate of increase in prices of products and services in the economy.Example of inflation is current rise in bus fares,food prices, rent, fuel prices,real estate, etc as we have seen in the example above.

INFLATION from investor's point of view is a lethal weapon! This is because a serious investor has two obligations, One to protect his capital and second to maintain fair return on his/her investment. With inflated economy one may lose value of his/her investment because to protect capital he/she should maintain return on investment which is hire than the rate of inflation. With current(April 2011) 8.5% inflation rate, already our savings at bank attracting 6% interest we are losing 2.5% to inflation, what a mess! Instead of saving money into your bank account why cant you buy some gold,silver,copper,maize,beans,Petroleum or diesel? Therefore conserving the value of your money you should be working around the clock to beat inflation. Also, to gain fair return on your investment is another obligation which may not be so easy if you slack around! What's a fair return? This depends on the investors perspective but averagely it may be gaining an edge on the average market return. In advance markets they use DOW,S&P 500 or NASDAQ indexes to measure their performance.

How do my investors hedge themselves against the wrath of inflation? As we have seen earlier that in economies with high rate of inflation money does not make sense then whatever excess cash should be directed to the factors that respond positively with inflation. Factors that moves with inflation are STOCKS,COMMODITIES and REAL ESTATE.

STOCKS: If you have some excess money/cash that can not afford buying a piece of real estate or which you will need in a couple of years ahead you can stash it in stocks especially in the companies that mostly deal with commodities like beer, cigaret, tea, etc because they can easily fight inflation by adjusting their product prices. Among the advantages of this way is that any excess amount whether a lot or little can be hedged well.

COMMODITIES: If you are a business person you may look for ways of stocking commodities that are on the inflation roller coaster! Also, for the big guys you may start hedging by buying gold,silver,copper and other exchange traded minerals. for example if tanzania
Central bank stocked Gold instead of USD dollars, Tanzania would be profiteering from the current high gold prices.

REAL ESTATE: Real estate has being performing well in hyperinflation most of the times. However, lack of city plans,ownership titles and lack of pricing model/mechanism pose a great risk to investors. One can difficultly determine the market price of a piece of real estate, this poses a risk of paying more than the market price. However for experts real estate poses a great opportunity as well.

Well, these ways are not conclusive but are among the most applied mechanisms in mitigating risks posed by inflation.

I would like to advice you to choose one of the tricks discussed above to protect your purchasing power and enriching your self. Just remember that, Cash in Hyperinflation economy is not a good commodity or a good storage of value!

Emmanuel Akyoo,
Managing Director,
Epak Capital Ltd.