Tips for Thought

Recent news depicted that central banks may raise interest rates unexpectedly by half a percent on Thursday. According to CNN, although inflation has slowed in many countries after more than a year of interest rate hikes, the number remains at least 2% above what most central banks are targeting.

While this news may seem harrowing at first, there are some tips that everyday residents can do to get on as prices start to rise. Here are some handy budgeting tips during an inflation period.

First, what is inflation?

Before we start with budgeting tips, we need first to understand inflation, primarily what it is and its causes.

In a general sense, inflation is a sudden rise of prices which eventually results in the decline of purchasing power. Purchasing power is the currency’s value based on the number of goods and services a unit of money can buy.

Inflation aims to measure the general impact of price changes for a wide range of products and services. These commodities include food items, raw materials like metal, and utilities like electricity. It also covers services like healthcare and labor.

When prices rise, a single money unit buys fewer goods and services. This loss of purchasing power can affect the cost of living for the public, eventually leading to the decline of economic growth.

While inflation can happen in short periods, experts believe long-term inflation occurs when a nation’s money supply growth exceeds economic growth.

What are some causes of inflation?

The leading cause of inflation is when the supply of money increases while outpacing economic growth. Here are some ways in which a country’s money supply increases:

  • Excess printing and giving away more money to citizens;
  • Legally devaluing the legal tender currency; or
  • The loaning of new money as reserve account credits through the banking system.

What are the effects of inflation?

Inflation creates many effects, which can be categorized into three effects as follows:

  • The Demand-Pull Effect. The Demand-Pull effect of inflation happens when a country’s supply of money and credit increases the overall demand for goods and services. This effect creates demand and leads to rising prices.
  • People with more money have higher spending, which pulls prices higher. While it may seem optimistic initially, it creates a demand-supply gap with higher demand and less flexible supply, thus eventually resulting in higher prices.

  • The Cost-Push Effect. Another effect of inflation is the cost-push effect, where price increase works through the inputs of the production process. The cost for all intermediate goods rises when the increased money supply is channeled into a commodity or other asset market.
  • For example, a company that sells computers may find it difficult to sell its products to the same number of customers at the same price if the production costs increase. When this happens, companies will increase the price of their goods to match higher costs. However, if the demand fluctuates or decreases, the prices will likely return to their original prices.

  • Built-in Inflation. This effect is the adapted expectations of people who expect current inflation rises to continue. As the price of goods and services grows at a similar rate, workers may demand more costs or wages to maintain the standard of living—their wage increase results in higher costs of goods and services.

How to Budget During an Inflation:

During this period of rising prices, financial experts suggest that people must learn to stretch their income as effectively as possible. When prices are high, individuals may need to spend more than necessary, which can create a dent in their financial profile.

Inflations are unpredictable; even the most seasoned economists don’t know how high the prices will go and how long they’ll last. This instance suggests that one should take the necessary precautions to not burn into their salary and wait for the next payout.

Here are some budgeting tips to follow during inflation:

1. Review your mortgage costs.

One of the highest budgeting costs may include your mortgage. However, one way to save up on your mortgage fees is through refinancing, which means trading your current mortgage for a newer one. This step includes a new principal and a different interest rate. If your lender agrees, you can use the more recent mortgage to pay off the old one to have a lower monthly payment.

However, that may be easier said than done. Individuals who don’t qualify to refinance their home due to their credit history may find other ways to keep it, like shopping around for more affordable homeowners insurance. Finding a reasonable insurance policy can help offset your significant spending and reduce your monthly payments.

2. Budget your other debts.

Do you have other debts to pay for, like credit cards, student loans, etc.? It may help to look for affordable ways to pay off debt. For instance, users can search for 0% APR balance transfer offers or find low-interest personal loans. People can also refinance their student loans to help secure a lower rate when paying them back.

3. Look at your energy bills.

Another great driver of inflation is the cost of energy. These sources include coal, gas, heating oil, and electricity. One way to help balance out your energy costs is to review your monthly expenses for fuel and electricity costs.

You can also learn some energy-saving tips like replacing lights with energy-efficient lightbulbs, adjusting thermostat settings a degree lower during winter, unplugging devices when not in use, and carpooling when you need to go to work to share fuel costs.

4. Cancel any unnecessary subscriptions and fees.

Subscriptions to your favorite streaming platforms may seem like a great deal, but a chunk of it can quickly stack up over time. Subscribing to multiple services but rarely using them isn’t making the most of your money. If you have multiple subscription plans, consider cutting them off and sticking to the ones you use the most.

5. Invest in inflation-proof assets.

One may think that no one has the time to invest, especially during inflation. However, that couldn’t be further from the truth. Investing in inflation-proof assets like gold, real estate, and commodities like raw materials are great ways to make your money work for you.

Takeaway: Inflation isn’t necessarily a bad thing. It can be advantageous with better investment returns, higher income, and higher profits.

However, to avoid bearing the brunt of its adverse effects, it helps to plan your life accordingly through proper wealth management and careful investment. If you need help with investing, consider hiring a financial advisor today. Remember to do diligent research!