Learn About Inflation, Its Terms, and How to Fight Against It.
What is inflation? It's a global phenomenon that demands our attention. Just when we thought things were settling down, inflation emerges as a prominent concern.
To encapsulate the current state of the US economy, the word of the hour is inflation. What used to be a chapter in high school economics has become the most popular topic of discussion. So, what does inflation really mean? Allow me to provide a concise explanation.
What Is Inflation?
Inflation refers to the continuous increase in prices of goods and services. It reflects how prices gradually rise over time, leading to a decrease in the value of money. While it may not be the most captivating conversation starter at a dinner party, it's important to recognize that inflation is not a recent development. It's not some obscure financial term that only surfaced in 2020. Inflation has always been a part of our economic landscape.
Deflation
If you search for "what is inflation" on Google, the next topic that often follows is deflation. So, let's dive into that as well. Deflation refers to a situation where the prices of goods and services decrease over time, and the inflation rate falls below 0%. In simple terms, it means that your money can buy more, whether you're shopping in stores or online.
While deflation may initially seem beneficial, it can actually bring about a range of issues. These include a lack of economic growth, stagnant income levels, and a significant number of job losses. However, it's important to note that these days, our primary concern lies more with inflation than deflation.
Stagflation
Stagflation occurs when there is a simultaneous occurrence of slow or halted economic growth, high unemployment rates, and a persistent increase in the cost of goods and services. This combination can be quite problematic.
The United States experienced stagflation during the 1970s, and there are concerns among some analysts that it may happen again if the situation doesn't improve soon.
Hyperinflation
Hyperinflation, as the name suggests, is essentially inflation on steroids. It refers to a situation where the prices of goods skyrocket at an alarming rate and spiral out of control. Economists generally classify hyperinflation as monthly price increases of 50% or more. To put it into perspective, imagine a gallon of milk that cost $3.50 in May, jumped to $5.25 in June, and further soared to $7.88 in July. Astounding, isn't it?
While it may seem unfathomable, hyperinflation has occurred in history, notably in Germany following World War I. However, it is important to note that hyperinflation is a rare phenomenon. Now, since you're probably curious about inflation in general, let's shift our focus back to regular inflation, which is currently taking place.
Inflation's Impact on You and the Economy
If you're still wondering about the essence of inflation, let me clarify. In most cases, inflation arises from the fundamental issue of supply and demand (which many of us are currently grappling with). When goods or services become scarce, their prices rise, and a scarcity mindset takes hold (where you fear there won't be enough for you to acquire). Conversely, if the market is flooded with ample supply, demand wanes, and prices decline.
To put it simply: Oversupply leads to lower prices, while undersupply leads to higher prices.
When inflation takes hold, its effects are swiftly felt in stores and, naturally, in your wallet. Prices of meat and seafood have surged by 79%, dairy prices have increased by 76%, and fresh vegetables have seen a 71% hike. As prices rise, the dreaded concept of "inflation" starts impacting you directly. Everyday items that were once reasonably priced suddenly become more expensive. Who would have thought cheese could be so costly? It's not just your imagination.
So, how can you protect yourself from the adverse effects of inflation? If you believe you can simply evade it, it's time to reconsider. Thankfully, there are several measures you can take to safeguard yourself from inflation's impact.
1. Stay calm and collected.
When the topic of inflation arises, it often seems like everyone's rushing to hoard fuel, amass gold, panic-buy baking yeast, and hide their money under the mattress. Whoa there, friend. Take a moment to breathe and relax. There's no need to fret as you make your preparations. And the first step is to stay composed.
2. Stick to your financial plan.
Regardless of inflation, you still have control over your money. By creating and following a budget, you can ensure that your money is allocated to the right places while also identifying areas where you can save.
3. Adjusting to Changing Prices
On the less delightful side of things, if you notice that prices for essential items such as food and fuel are rising in your area, it's crucial to adapt your budget accordingly. Perhaps you've experienced the frustration of seeing the price of a gallon of milk jump from $3.50 to $3.99 before. (Believe me, I can relate.) By having a well-structured budget in place, you'll have a clear understanding of your available funds and won't be caught off guard.
Let your budget be your guiding compass as you search for ways to save money and tackle the challenge of affording that ridiculously expensive milk. Maybe it means temporarily pausing your child's ballet classes since you're not currently traveling and can reallocate those funds.
4. Take proactive steps.
If you're looking to tighten your belt and save even more money, explore ways to reduce your grocery bill or cut down on petrol expenses. It might be time to opt for generic brands or consider carpooling to work. Additionally, keep an eye out for good deals on canned goods and other pantry staples that you regularly use and stock up when you come across them. Just be sure to allocate funds for such purchases beforehand. This way, you'll have a clear spending plan, avoiding impulsive buys (remember the toilet paper frenzy of 2020?).
5. Invest your money.
Whether we like it or not, inflation is a reality. If you're planning to retire in 20 or 30 years, it's almost certain that the cost of basic items like bread, gas, and coffee will have significantly increased. The best way to shield yourself from the impact of inflation, which is unavoidable, is to start investing your money as soon as possible. However, if you still have outstanding debts (aside from your home) or lack an emergency fund, it's crucial to address those financial priorities first. The sooner you tackle these matters, the earlier you can begin investing and working towards your long-term goals.
What is inflation? Well, the good news is that you can indeed combat it with the right tools. Are you prepared to face inflation head-on? Start by developing a sound investment strategy. Consider consulting with a financial advisor who can guide you in managing your money effectively, ensuring you're well-prepared to navigate any potential financial challenges in the future.
