The government has been keeping inflation numbers secret from the public for decades, but now that we have a president who is obsessed with keeping inflation numbers secret, we can finally get some real numbers to go by. First, let’s look at the overall rate of inflation. It has been on a steady rise since the 1970s, and in the last decade has averaged around 2% per year. Most people are used to hearing the word “inflation” used to describe rising prices, but what does the term really mean?
Inflation is the price of goods and services rising more quickly than the amount of money people are willing to spend. And it’s a big problem, because nobody likes to pay more for the same thing. On a small level, you can see inflation on a day-to-day basis. If your coffee costs $3.50 and you buy it every day, then five days later its price is $3.75 because of inflation. If you’re not careful, you can end up paying more and more for the same thing every day.
“Inflation” is a fancy term for the rising prices of goods and services in a country. It seems like a simple concept, but it’s actually a very complex issue. Inflation is a normal and constant part of the economy. Prices rise because, as time goes on, more and more stuff is produced. For an economy to be healthy, products need to be cheaper in the future than they are today.
If you haven’t been living under a rock over the last several months, you’ve most likely heard the word “inflation” used. My initial reaction is to exclaim, “Oh my, that’s terrible!” when I hear the term inflation. And I believe that this is a typical occurrence for many individuals.
And when I look around at the pricing of goods today, it’s blatantly apparent that inflation has been at work all along.
That $2 movie and popcorn I used to go to with my father on weekends is now easily $20 per person. And my family’s vacation to Disney World in 1995, which cost less than $150 for my family of four. Could you image attempting to get a family of four out of a Disney park for less than $500 today?
While inflation is always at work behind the scenes, it’s often difficult to explain why we feel the way we do about it or if it’s truly as terrible as people make it out to be.
So, if you’re wondering what inflation is, we’ll explain all you need to know.
We’ll go through the following topics in this article:
- What is inflation?
- What is the source of it?
- Who is benefited by inflation?
- What is the current state of inflation?
- There are three methods to fight inflation.
What is the definition of inflation?
Consider how you inflate a balloon. Isn’t it supposed to go all the way to the ceiling? In the same way, when an economy suffers inflation, prices of products and services increase.
When prices rise (for a variety of reasons that we’ll discuss below), the value of our money, or our buying power as consumers, decreases. This implies that ordinary items such as a gallon of petrol or a carton of eggs cost more money.
My father’s first vehicle cost about $.60 a gallon when he was a kid, compared to the nearly $3 I’m accustomed to spending now. In the past 40 years, there has been a fivefold rise.
The problem with inflation is that it tends to occur throughout economies and cannot always be avoided. In the United States, for example, the Federal Reserve is in charge of attempting to control inflation by raising interest rates for borrowers in an effort to reduce expenditure. While these steps may assist at times, they will never be able to completely halt inflation.
There are three major kinds of inflation, according to most economists.
- Built-in inflation: This commonplace inflation goes mostly undetected. As prices rise, salaries rise in lockstep, and the economy remains in a condition of relative equilibrium throughout time. At work, you may be acquainted with a yearly “cost of living rise.” These exist to aid in the fight against inflation, which occurs on a regular basis.
- Inflation that occurs as a result of an inflow of money and credit into an economy is known as demand-pull inflation. There is a higher demand for goods and services when individuals have more money to spend. And when demand outstrips the economy’s capacity to create products, prices rise as a result of the scarcity of supply. Demand-pull inflation is well-exemplified in real estate. As we’ve seen over the last year, there’s a higher demand for houses than there is supply. In addition, demand-pull inflation has been at work throughout the nation, as shown by increasing house prices.
- Cost-push inflation occurs when the cost of producing something increases, forcing producers to pass part of the cost on to consumers. If the price of coffee beans increases, Starbucks will have to raise the price of your morning coffee.
There may be many abrupt catalysts for inflationary cost rises behind the scenes for each kind of inflation. These may include the following:
- Natural catastrophes: Natural disasters such as hurricanes, winter storms, or a worldwide pandemic interrupt supply chains and make raw materials for widely used goods less accessible.
- Firms increasing prices: When companies need to pay workers more money to remain competitive, they may raise their prices to pass along the cost to customers. When the cost of the raw materials used to make their products rises, companies may raise their prices.
- Consumer demand for goods will grow as a result of a rapid inflow of money into the market, leading prices to rise. We’ve just witnessed a huge inflow of government stimulus money, which implies customers may have more money to spend on products.
It’s a recipe for disaster when one or more of these scenarios occur at the same time. And, as with any catastrophe, winners and losers are unavoidable.
Inflation Benefits Whom?
Every economic scenario seems to generate winners and losers. As we witnessed with the epidemic, some individuals lost a lot of money, while others made a lot of money by making good investments.
When inflation rises, those who have borrowed money at a low fixed rate benefit the most. For example, I purchased a vehicle many years ago with a 5-year loan with a fixed interest rate of 2.74 percent. When a result, as inflation rises, I’ll end up paying the dealer less than I would if I bought the vehicle today.
Companies who can charge more for their goods, as well as investors with assets that are favorably affected by inflation, are also winners. Inflation may increase the value of assets such as real estate or a certain sector of equities such as technology.
Those with a large amount of cash, those with fixed income, such as pensioners, and debtors with variable-rate debt are the most vulnerable to inflation. I struggle with how to handle cash during inflation because it’s a catch-22. I’m a big proponent of having a fully funded emergency fund. An emergency reserve of approximately $20,000 is kept in my possession. And that money isn’t getting you anywhere.
Now I may invest that money in things that I believe will appreciate in value when inflation rises. But that also means I’m jeopardizing my security blanket, which I don’t want to do.
So I’ll take being a loser and potentially missing out on a lucrative earning opportunity if it means having that cash buffer in my back pocket, especially since we never know how long an inflationary period will last.
What Is the Current State of Inflation?
Since June 2020, prices have risen at a startling 5.4 percent year-over-year, according to the Bureau of Labor Statistics consumer price index (CPI). When you compare it to the usual rate of inflation, which is about 2% each year, you can understand how worrisome that figure is. And if you’ve attempted to purchase a used vehicle, any kind of timber, or a house in the last year, you’ve experienced the effects of this huge price rise firsthand.
But why?
For one thing, the epidemic has caused significant supply chain disruptions. Cost-push inflation is exemplified by a rise in the cost of raw commodities obtained via these supply networks.
Let’s take a look at timber, for instance. Shutdowns and higher COVID safety regulations affected the inputs needed to acquire, process, and transport the timber needed for things like constructing new houses during the epidemic.
Add in the fact that hundreds of millions of individuals are now sitting at home daydreaming about all the wonderful home remodeling tasks they should be doing (guilty as charged). So when people rush out to purchase timber for those projects or just decide, “you know what, it’s certainly time to buy that larger home we’ve been putting off,” you have a perfect storm of demand-pull inflation.
Lumber prices rose dramatically in 2020, then again in 2021, reaching an all-time high of almost $1700 per thousand feet board in May 2021, as you can see in the graph below.
https://commodity.tradingeconomics.com/lumber/
So, if you’re a math whiz, here’s what you should do:
When there is less timber available and more people desire it, the price of lumber rises.
However, what we’ve observed isn’t restricted to lumber. It’s occurred with car chips, toilet paper, air conditioners, and just about every other consumer item you can think of.
While “normal life” is finally returning, it may be some time before supply chains catch up to demand and prices begin to level out.
Another factor contributing to the current wave of inflation is the enormous inflow of cash into the economy during the last year. Around $4 trillion in money was “printed” by the Federal Reserve. As a consequence, beginning in 2020, you can observe in the graph below a substantial increase in the Federal Reserve’s total assets, the likes of which haven’t been seen in the previous 15 years.
https://www.officialdata.org/us/stocks/s-p-500/1957/s-p-500/1957/s-p-500/1957/s-p-500/1957/s-p-500/1957
While the stimulus cheques have been a boon to low-income families, they are not without drawbacks. Our purchasing power decreases when more money is poured into the system. People also have more money to spend, resulting in greater demand and higher costs.
When it comes to inflation, there isn’t usually a single input that you can point to and say, “That’s what caused it!” Instead, it’s usually a mix of variables, such as the COVID epidemic, which we’ve seen in full force.
But be assured that there are methods to safeguard ourselves while we go through this current round of inflation, whether it lasts months or years.
Four Ways to Fight Inflation
Boost your profits
Because inflation is expected to exceed the average, it would be ideal if employers could substantially increase wages. But it is just not the case. Instead, during a period of economic inflation, you may choose part-time employment or side hustles to supplement your income.
To break even if inflation is presently at 5%, you’d have to raise your salary by 5%. And any extra money you earn is a bonus, meaning you’ll beat inflation at its own game. However, if you don’t work harder to make more money, you’ll continue to lose money as your buying power declines.
If you’re self-employed, like me, you may be able to increase your rates to compensate for the greater cost of products. Earning additional money in whatever way you choose may assist offset the increased costs of food and other necessities brought on by inflation.
Put a stop to your savings.
At present rates, the best you can earn in a conventional savings account, or even a high-yield online savings account, is about 1 percent. That implies that, with inflation hovering around 5%, you’re losing 4% on your money while it’s sitting in your account.
As I have said, having an emergency fund is critical, particularly during difficult economic times. However, during this inflationary time, it may be prudent to avoid putting any future savings into a conventional savings account.
Instead of stashing your vacation funds at your local credit union, consider putting them in a taxable brokerage account where you can beat inflation.
Put money into it (and not in bonds)
Bonds may not keep up with inflation since they are fixed-income investments, meaning they pay the same guaranteed amount for months or years. As a result, many individuals hurry to sell bonds during an inflationary era, resulting in a larger loss for surviving bondholders.
The stock market is the greatest place to invest to protect against inflation. That’s because, on average, the stock market outperforms inflation, meaning that although inflation increases, the stock market usually grows faster.
Since the S&P was created in 1957, it has averaged returns of 10.34% per year. Adjusted for inflation, that’s a return of 6.5%. Not too shabby.
If you’re a stock picker, investing in businesses that make essentials may be a wise decision. People may put off non-essential purchases when costs increase, but they will continue to buy toilet paper and other home essentials.
Debt with variable rates is exchanged for debt with fixed rates.
When you experience inflation, your buying power decreases in relation to the cost of products and services. As a result, you’ll want to keep your expenditures under control. Making as many fixed-rate payments as feasible is one method to do so.
Variable rates are subject to market fluctuations. Instead, whether you have a mortgage or a car loan, attempt to lock in a cheaper fixed rate. You may also wish to pay off any outstanding variable-rate credit card or loan debt.
Unfortunately, interest rates may rise suddenly and unexpectedly, costing you a lot more money at a time when you’re already struggling.
Final Thoughts
Excessive inflation over time will put a burden on many people’s finances. And today’s truth is that we’re in the midst of an inflationary era that we don’t know how long will continue. However, keep in mind that there are methods to protect yourself against inflation, such as:
- Increasing your earning potential
- Only retain the cash you’ll need for an emergency fund.
- Investing in the stock market is a great way to make money.
- When feasible, lock in fixed interest rates.
- If at all feasible, deferring bigger purchases until prices have stabilized.
Inflationary periods aren’t good for making major life changes or large expenditures. So be sensible, concentrate on spending wisely and earning more, and you’ll be able to safely ride this inflated balloon back to a more acceptable location.
Continue reading:
- How to Safeguard Your Retirement Funds in the Event of a Stock Market Crash
- Understanding Stock Market Trading For Beginners is a quick reference guide for those who are new to the stock market.
- What is the Best Way to Invest in Stocks?
What Is Inflation and Why Is It Increasing? first published on Minority Mindset.
When the average American looks at inflation, they see a rising grocery bill and a rising monthly mortgage payment. But what if that isn’t where inflation is coming from? If you look at the longer term view inflation is very low and usually rising. We are becoming a nation of debt slaves, and it’s working.. Read more about causes of inflation in the philippines and let us know what you think.
Frequently Asked Questions
What is rising inflation?
Rising inflation is the general term used to describe an increase in price inflation in an economy (look at the CPI figure). More narrowly, rising inflation is when the Consumer Price Index rises above the target of the Federal Reserve of 2% on average. Who sets a goal for the CPI? The target range of the Federal Reserve is 2%. They argue that GDP is a measure of inflation and therefore a 2% economic target is needed for an economy to be stable. What is deflation? Deflation is when the general price level of a good or service falls in an economy. A good example of deflation is when deflation begins to happen in an economy. What is generalized deflation? Generalized deflation is when the price level of all goods declines rather than one, specific good. An example of generalized deflation in general could be example, Amazon selling a ton of books for cheap over the span of a few short days. What are the benefits of deflation? Some economists argue that a decline in the general price level has benefits such as encouraging saving money and increasing investment. Who sets a goal for the CPI? The Federal Reserve sets their pricing goal target and the CPI market. What is a price fixing policy? Governments control the prices of a particular product or service through their policies allowing for a little bit of control over the prices.
What do you mean by inflation?
An effect in which levels of prices change over time, often at an increasing rate. The inflation rate is a measure of the general level of consumer prices in an economy. It’s calculated by taking an economy’s cost of living and adjusting it.
What will happen if inflation rises?
Inflation is the result of the paper money supply expanding beyond the physical supply of goods. Traditionally in the US, the Bureau of Labor Statistics (BLS) keeps track of broad economic indicators, such as: -Consumer prices -Total wages -Gross domestic product If inflation continues to increase, consumers may notice these shifts in their daily lives. Inflation causes costs, such as housing, education, and even fruits and vegetables, to go up in price. Many businesses will also find it harder to remain competitive in this current climate. -Consumer prices: People will notice a shift in consumer prices observed as a result of inflation. Initially, prices will rise at an estimated 3% a year. After 10 years, this estimate increases to 12%. -Total wages: Wage growth will probably decrease coming in at just half as much as before inflation. -Gross domestic product: If inflation continues, the GDP of the US may actually increase, meaning that the GDP of the US will go up if inflation goes up. -Housing: More money being spent in the housing industry with more jobs in construction is another outcome of this. -Education: As already explained, education costs will increase because of inflation too. -Fruits and vegetables: Some produce may also increase in cost as the demand for them rises. -Competition: It is possible that businesses will be shut down and consolidate due to the increase in costs. -Inflation: If inflation keeps going up, there may be a similar effect. -Prices: More money being put into the same types of goods as before with less goods being available to buy will lead to rising prices. Given these effects, it might seem as though inflation would always be increasing. This is not true, however. -Consumer prices: Monthly inflation rates are the percentages of a price change in a specific month. This is measured as a number that is positive following a negative.
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