Everybody knows what is inflation as it is easily understood. Although it might takes a myriad of think tanks to find out the root cause of the problem, the problem is quite simple, and investors can easily prepare their portfolios to fight inflation.

One of the most common reason that inflation happened was due to the issuance of new currency by the central bank and the reduction in interest rates. Another place where inflation happened is government debt issuance, whereby one nation borrows money from another and increases the amount of money in circulation within the borders of the borrowing country.

The last culprit of inflation, and undoubtedly the weakest, is the velocity of money. When money is moving faster through the economy, prices are quicker to inflate, although the supply remains the same. The velocity of money is usually only temporary, such as the increase in prices in a specific city during the Olympic Games.

Due to the processes that create inflation, it typically affects certain markets before others. One of the first markets to experience inflationary conditions is the commodities and metals markets.  When central banks lower the interest rate, investment banks and other investors find it less expensive to leverage upwards, and thus, they make larger bets in the capital markets. In addition, the capital markets come with few restrictions and excellent liquidity, providing an opportunity to move new money in and out of the market relatively quickly.

The next sector that is prone to inflation is the real estate market. Although real estate is typically considered illiquid, it is full of investors and ordinary homeowners who use low rates created by a central bank to buy housing inexpensively to fight inflation.

The final destination for inflation is consumer prices at retail outlets, stores and restaurants, as the higher prices in raw goods on the commodities market make their way down the supply chain to the end consumer.

Inflation has dramatic impacts on the business cycle and even larger impacts on the raw spending power of consumers. A stable currency and exchange rate are one of the keys to a solid and productive economy.

Today, however, volatility in the value of the currency prohibits companies from making long term contracts and guaranteeing prices, which has further eroded the spending power of consumers.

Inflation is a market problem that only affects those who are not properly hedged against the risk of growth in the money supply. Although precious metals are often regarded as a hedge to fight inflation, they typically perform better than the rate of inflation and the increase in the money supply.

For example, the US dollar has depreciated by only 8% in 2009, yet silver's price has grown more than 57%. Although prices may have increased in US dollars, they're down considerably from the start of 2009 when priced in silver.

It has never made more sense to own silver coins to protect yourself and fight inflation, but also to grow your spending power as the US dollar deteriorates.

Small steps are a great way of getting started to fight inflation.

Stocks Investing Related Articles:

• Trading Margin Is a Double Edged Sword

When investing in the stock market, you are given the option of opening a cash account or a trading margin account.  Many stock guru talks about how you can increase your stock income using margin account.  For the average stock investor........
 
• How To Enter and Exit Stocks Correctly

Make your Trading Rules to enter stocks very simple and easy to implement. Only trade on breakouts which are in fact added corroboration of an upward pattern. Don't worry, there are way more than enough of those going around.......
 
• Correct Your Incorrect Shares Trading Belief

The lure of great profits have convinced a lot of people that they should earn how to trade stocks. Do bear in mind though that it's always easy to get caught up mainly in the glowing attraction of gaining financial freedom.......