The very word “inflation” makes most people nervous. We immediately begin to worry that our income, savings, and businesses will suffer. This post will explain inflation and how to address the issue.
What is inflation?
When the prices of products and services rise across the economy, it is inflation. In other words, your money will go farther than before inflation began. With their current salaries, people cannot pay their bills or buy food, clothing, and essentials at the prices they did before.
Businesses cannot buy materials at the price they must to maintain their current prices. Some must cut back on the number of employees they can employ to keep the income levels they need to survive.
What causes inflation? Inflation is an economic distortion that affects the economy in unpredictable ways. It is created when more money is produced than can be used for production and consumption. The government fights inflation by implementing policies to limit its growth.
A government’s strategy to combat inflation should include a balanced approach. For example, an increased supply of goods will be beneficial to lowering the overall price level in the economy.
While the government is the most effective tool to battle inflation, there are a number of factors that can be affected. Some of these factors include the supply side and the demand side.
Supply chain issues can disrupt the economy’s flow of goods and services. In addition, higher energy and commodity prices may cause cost-push inflation. Cost-push inflation occurs when there is no change in demand, but there is an increase in the costs of commodities, raw materials, and machinery. Increased labor rates will also cause an increase in production costs.
On the other side of the equation, when prices go up due to supply shortages, it creates demand-pull inflation. In other words, people have the money for the things they want to buy, but no item is available due to supply shortages.
Hyperinflation and Stagflation
During the early 1990s, many Latin American countries experienced hyperinflation. Hyperinflation is fast, unrestrained, and out-of-control price increases in an economy. Inflation measures rising prices for goods and services, and hyperinflation is quickly rising inflation, usually measuring more than 50% per month. A hyperinflation is a rare event.
Stagflation is a period of slow economic growth, high unemployment, and rising inflation. One of the main reasons why inflation occurs is because of hoarding. When people hoard, they hold on to perishable goods because of higher prices. Also, businesses cut staff, raising costs for production.
A recent survey by Capital One found that many small-business owners have already taken steps to be prepared for inflation. While not all companies offer the same protection, some have taken advantage of the trend by building up their savings accounts and buying more inventory.
The key is not to be paralyzed by fears. It is essential to understand that inflation is not inevitable. In fact, in the hands of professionals, it can be used positively. However, with high inflation comes high-interest rates, so be sure to get prepared for the ride.
In addition to building up your savings account, you may also want to start saving for retirement. This can be as simple as putting 10-15% of your paycheck towards a retirement fund.
During inflation, investing in the stock market is a wise move. Not only will this help protect your savings against high inflation, but it will also provide a higher yield. If your retirement portfolio is built around a well-defined investment plan, you should see your investments last through retirement.
Aside from the obvious, you can also prepare for inflation by reducing your spending. This can include cutting back on high-priced goods and switching to lower-cost substitutes. To make it easier to sock away a rainy day fund, you should buy large quantities on sale or stock up on nonperishables.
Inflation is not fun for anyone. But it happens. The key is not to be driven by fear. Seek expert advice as linked in this article. Cut nonessentials and save. There is no such thing as “small savings.” Anything you can put away during inflation is worth the effort.
Refrain from making new bills. Pay off any debt that you can. Add a bit extra to your retirement plan. Watch for good markdowns and stock up. Avoid investing in clothing, automobiles, and new electronics. There are plenty of online budgeting services and apps that can help you.
Inflation is not a new problem. This is not the first time the people of the United States (and the world) have faced it, and it will not be the last. But we will overcome it. Be smart, be patient, and hold on. You will come through this, and better times are ahead.