Wherever you are in the world, there’s a chance you may have stumbled upon the term “inflation”. Be it as a side conversation, or an unavoidable headline on the TV, it’s pretty hard to escape. So, what exactly does it mean? And why is everyone worried about it?
Inflation refers to the change of the monetary value of a currency. Simply put, you can see it when a 100$ bill can no longer cover the cost of the same goods and services that it did before. Inflation creates an “imbalance”, which is felt differently from one country to the other. For example, when comparing developed countries and developing countries, we can see that they each face different challenges as a result of inflation. However, one way to assess the impact of inflation, if you’re living in the United States, for example, is to assess the gap in spendings between urban consumers and the spendings in all households of the United States.
Inflation has happened a lot throughout the years. It’s seen as a common, and often healthy economic development too! While experts argue about the number of causes of inflation – a disparity in supply and demand is not uncommon, and today we can clearly see an example of this with a view toward the Covid-19 pandemic, and current Russian-Ukrainian situation.
In terms of the global economy, these conditions have resulted in international investments becoming compromised, rising problems with shipments, and unreliable production lines. To put it another way, the demand increased, while the supply remained at a shortage.
So, if we know some of the causes of inflation, and if we know that it’s a recurring economic event, why panic? As of March 2022, inflation has reached an 8.5% increase, which is the highest rate in more than 40 years! The problem with this is that people with lower incomes are the ones who carry the “burden of inflation”. But, the positive news is, there are ways we can fight inflation, and protect our financial health from it! Here’s how!
While our initial thought might be to become more strict with our spendings, and foster a “savers” mindset, economic scholars criticize this concept, referring to “a second cost […] imposed on […] savers.” So, what can we do instead?
Set a Budget
You’ve probably heard this one a lot, but setting and sticking to a budget can help us have a better understanding of our expenditures. One way that can encourage us to cut our expenses could be pricing comparisons, be it groceries or even gas prices. Another way is to be more aware of the services you pay subscriptions for. It can also help us set aside unnecessary spendings (till prices drop)!
Pay Off Variable Debts!
There’s a common misconception that paying off debts should be at the bottom of the spendings list, but experts have another say. They claim that paying debts, such as credit cards, and mortgage loans, should come as a priority, even before investments, especially if the interest rate is high!
Savings and Investments
Setting some cash aside can be a part of your budgeting plan. Keep that extra money, and decide what to do with it later. You can explore your investment options – it doesn’t have to be in stock markets – you could invest in your home (if you’re a homeowner) by refurbishing it, for example. A word to the wise, don’t put all your eggs in one basket – it’s a good idea to “diversify your investments.” Another way to spend the extra cash you have is to keep it in a savings account, one that you can rely on during tough times.
Inflation is neither a bad nor a good thing per se, it’s an economic circumstance, and like everything in life, it requires a healthy balance! But, because we can’t single-handedly control the global economy, the best way for us to find a balance is by boosting our financial literacy in order to enable ourselves to foresee such events, and prepare ourselves to react in a calm, self-assured, and an organized manner.