Price increases could be a sign of a fast-growing economy. Demand for products and services is fueled by people buying more than they need to avoid tomorrow’s rising prices. Suppliers are unable to keep up. Worse still, neither can wages. As a result, most people are unable to afford common products and services.
What impact does inflation have on ordinary people?
Inflation reduces the purchasing power of the common person. Because we all buy different things and services, everyone’s genuine inflation rate is different.
Used automobiles and car rentals, furnishings, airline fares, hotels, and basic necessities like groceries and gas should all be expected to cost more. For example, the cost of a used car has increased by 29.7% over the previous year, while the cost of apparel has increased by 5.6 percent. Housing and remodeling materials are likewise at an all-time high.
“All of this means your paycheck isn’t going as far as it used to,” says Steven Saunders, director and portfolio advisor at Round Table Wealth Management. “Unless your wages are increasing at the same rate, which hasn’t been the case for most people.”
But, as Marguerita Cheng, certified financial planner and CEO of Blue Ocean Global Wealth, points out, that’s no reason not to spend money, especially after the past 15 months. “You just need to be aware of the higher prices.”
What is inflation, and how does it influence a family’s finances?
Important Points to Remember Inflation is defined as a rise in the cost of goods and services. Alternatively, the dollar’s purchasing power is eroding. The shift in the cost of fundamental requirements of life, such as food, shelter, and healthcare, is measured by cost-of-living.
What effect does inflation have?
The entire economy is impacted when energy, food, commodities, and other goods and services costs rise. Inflation affects the cost of living, the cost of doing business, the cost of borrowing money, mortgages, corporate and government bond yields, and virtually every other aspect of the economy.
What impact does inflation have on the economy?
Inflation is defined as a steady increase in overall price levels. Inflation that is moderate is linked to economic growth, whereas high inflation can indicate an overheated economy. Businesses and consumers spend more money on goods and services as the economy grows.
What are the benefits and drawbacks of inflation?
Do you need help comprehending inflation and its good and negative repercussions if you’re studying HSC Economics? Continue reading to learn more!
Inflation is described as a long-term increase in the general level of prices in the economy. It has a disproportionately unfavorable impact on economic decision-making and lowers purchasing power. It does, however, have one positive effect: it prevents deflation.
What is the impact of inflation on income and consumption?
Take out your wallet and pull out the PhP 50 bill. If you look at it closely, you’ll notice a sense of nostalgia. This bill is not the same as the one you had a decade ago. It definitely looks different, and the one you’re holding now isn’t worth the same as the PhP 50 you had back then, which was enough to get you a lunch at your favorite fast food joint.
Nowadays, your PhP 50 will only get you a little dinner, and how you wish you could travel back in time to when receiving PhP 50 from your parents was still exciting.
You may have figured out what causes the value of your money to depreciate. It’s a phenomenon known as inflation. Inflation, to refresh your mind, is the general increase in the prices of products and services over time, such as common foods, household goods, medical services, and transportation.
So, how does inflation affect your personal money, other from not allowing you to eat a lunch for PhP 50?
The rate of inflation fluctuates on a regular basis, and we rely on official data from the Philippine Statistics Authority, or Bangko Sentral ng Pilipinas, to establish how fast or slow it is. Between 1957 and 2011, the Philippines’ average inflation rate was 9.28 percent. 1
Let’s look at the cost of products and services in 2017 and 2018 to see how much inflation has affected your purchasing power. You’ll find that you have to pay much more for the identical stuff in only a year.
Assume a grocery bag including bread, fish, grains, meat, veggies, and fruits costing PhP 600 in 2017 costs PhP 631.2 in 2018. Similarly, if you paid PhP 500 in 2017 for water, electricity, and gas, the same services will cost PhP 526 in 2018. Other products, such as alcoholic beverages and tobacco, have witnessed comparable price increases. 2
When the cost of goods and services exceeds the amount of money you make, problems occur. Your purchasing power, or capacity to buy, decreases as a result. To keep up with the rising cost of living, inflation may require you to forego indulgences and “tighten your belt.” Small increases in spending can diminish your disposable income and, over time, erode the value of your savings.
Savings and investments do not always imply that your money is growing, particularly if the interest rate is lower than the rate of inflation. In fact, you could be squandering your hard-earned cash.
For example, if a business owner holds PhP 100,000 in a time deposit bank account earning 1% interest, the money will grow to PhP 101,000 the next year. If the inflation rate is 4.4 percent 3, the value of his/her money will only be PhP 96600the PhP 1,000 you acquired will not be enough to compensate for the PhP 4,400 worth lost due to inflation.
Who is affected by inflation?
Unexpected inflation hurts lenders since the money they are paid back has less purchasing power than the money they lent out. Unexpected inflation benefits borrowers since the money they repay is worth less than the money they borrowed.
What is the purpose of inflation?
When Inflation Is Beneficial When the economy isn’t operating at full capacity, which means there’s unsold labor or resources, inflation can theoretically assist boost output. More money means higher spending, which corresponds to more aggregated demand. As a result of increased demand, more production is required to supply that need.
What impact does inflation have on your savings and investments?
Most individuals are aware that inflation raises the cost of their food and depreciates the worth of their money. In reality, inflation impacts every aspect of the economy, and it can eat into your investment returns over time.
What is inflation?
Inflation is the gradual increase in the average cost of goods and services. The Bureau of Labor Statistics, which compiles data to construct the Consumer Price Index, measures it (CPI). The CPI measures the general rise in the price of consumer goods and services by tracking the cost of products such as fuel, food, clothing, and automobiles over time.
The cost of living, as measured by the CPI, increased by 7% in 2021.
1 This translates to a 7% year-over-year increase in prices. This means that a car that costs $20,000 in 2020 will cost $21,400 in 2021.
Inflation is heavily influenced by supply and demand. When demand for a good or service increases, and supply for that same good or service decreases, prices tend to rise. Many factors influence supply and demand on a national and worldwide level, including the cost of commodities and labor, income and goods taxes, and loan availability.
According to Rob Haworth, investment strategy director at U.S. Bank, “we’re currently seeing challenges in the supply chain of various items as a result of pandemic-related economic shutdowns.” This has resulted in pricing imbalances and increased prices. For example, due to a lack of microchips, the supply of new cars has decreased dramatically during the last year. As a result, demand for old cars is increasing. Both new and used car prices have risen as a result of these reasons.
Read a more in-depth study of the present economic environment’s impact on inflation from U.S. Bank investment strategists.
Indicators of rising inflation
There are three factors that can cause inflation, which is commonly referred to as reflation.
- Monetary policies of the Federal Reserve (Fed), including interest rates. The Fed has pledged to maintain interest rates low for the time being. This may encourage low-cost borrowing, resulting in increased economic activity and demand for goods and services.
- Oil prices, in particular, have been rising. Oil demand is intimately linked to economic activity because it is required for the production and transportation of goods. Oil prices have climbed in recent months, owing to increased economic activity and demand, as well as tighter supply. Future oil price rises are anticipated to be moderated as producer supply recovers to meet expanding demand.
- Reduced reliance on imported goods and services is known as regionalization. The pursuit of the lowest-cost manufacturer has been the driving force behind the outsourcing of manufacturing during the last decade. As companies return to the United States, the cost of manufacturing, including commodities and labor, is expected to rise, resulting in inflation.
Future results will be influenced by the economic recovery and rising inflation across asset classes. Investors should think about how it might affect their investment strategies, says Haworth.
How can inflation affect investments?
When inflation rises, assets with fixed, long-term cash flows perform poorly because the purchasing value of those future cash payments decreases over time. Commodities and assets with changeable cash flows, such as property rental income, on the other hand, tend to fare better as inflation rises.
Even if you put your money in a savings account with a low interest rate, inflation can eat away at your savings.
In theory, your earnings should stay up with inflation while you’re working. Inflation reduces your purchasing power when you’re living off your savings, such as in retirement. In order to ensure that you have enough assets to endure throughout your retirement years, you must consider inflation into your retirement funds.
Fixed income instruments, such as bonds, treasuries, and CDs, are typically purchased by investors who want a steady stream of income in the form of interest payments. However, because most fixed income assets have the same interest rate until maturity, the buying power of interest payments decreases as inflation rises. As a result, as inflation rises, bond prices tend to fall.
The fact that most bonds pay fixed interest, or coupon payments, is one explanation. Inflation reduces the present value of a bond’s future fixed cash payments by eroding the buying power of its future (fixed) coupon income. Accelerating inflation is considerably more damaging to longer-term bonds, due to the cumulative effect of decreasing buying power for future cash flows.
Riskier high yield bonds often produce greater earnings, and hence have a larger buffer than their investment grade equivalents when inflation rises, says Haworth.
Stocks have outperformed inflation over the previous 30 years, according to a study conducted by the US Bank Asset Management Group.
2 Revenues and earnings should, in theory, increase at the same rate as inflation. This means your stock’s price should rise in lockstep with consumer and producer goods prices.
In the past 30 years, when inflation has accelerated, U.S. stocks have tended to climb in price, though the association has not been very strong.
Larger corporations have a stronger association with inflation than mid-sized corporations, while mid-sized corporations have a stronger relationship with inflation than smaller corporations. When inflation rose, foreign stocks in developed nations tended to fall in value, while developing market stocks had an even larger negative link.
In somewhat rising inflation conditions, larger U.S. corporate equities may bring some benefit, says Haworth. However, in more robust inflation settings, they are not the most successful investment tool.
According to a study conducted by the US Bank Asset Management Group, real assets such as commodities and real estate have a positive link with inflation.
Commodities have shown to be a dependable approach to hedge against rising inflation in the past. Inflation is calculated by following the prices of goods and services that frequently contain commodities, as well as products that are closely tied to commodities. Oil and other energy-related commodities have a particularly strong link to inflation (see above). When inflation accelerates, industrial and precious metals prices tend to rise as well.
Commodities, on the other hand, have significant disadvantages, argues Haworth. They are more volatile than other asset types, provide no income, and have historically underperformed stocks and bonds over longer periods of time.
As it comes to real estate, when the price of products and services rises, property owners can typically increase rent payments, which can lead to increased profits and investor payouts.
Is inflation beneficial to the economy or detrimental?
Important Points to Remember Inflation is beneficial when it counteracts the negative impacts of deflation, which are often more damaging to an economy. Consumers spend today because they expect prices to rise in the future, encouraging economic growth. Managing future inflation expectations is an important part of maintaining a stable inflation rate.