Suffering Inflation: What Should We Do?
I don’t like higher gas prices. Like most people, I blame it on oil companies or the time of year, particularly when holidays are around the corner. Nobody, it seems, likes suffering inflation. Higher prices for consumer goods are spooky and alienating. So what’s really going on when we’re suffering from inflation?
Poor Monetary Policy
You and I don’t give much thought to monetary policy, but it influences inflation greatly. Your government attempts to control the money supply to get the economy to grow, and it’s all formulated in a government’s monetary policy. When it comes to rising inflation, a government uses monetary policy to keep prices constant and stable and to ensure that people trust the economy is working right.
When ordinary people like us see the price of gas sky-rocket by 100 percent in a short time, that is, to double in price, it’s not reassuring us that the economy is functioning, even when the price of gas at the pump is subject to fluctuations in the price of a barrel of oil. Still, high gas prices freak most of us out.
If you can only buy a small amount of gas for a buck, then the value of the American dollar is diminished, and the government tries to use monetary policy to fix the problem.
Who Benefits from Inflation
Inflation hits ordinary people negatively, according to the experts. If the dollar’s value is diminished, it hurts our buying power. So who benefits from inflation? Despite that truth, money that is worth less actually pays off more of your loans faster, so people who owe money can benefit from inflation. If you’re flush with cash, you can pay down debt faster.
While some believe rich people are swimming in gold jewelry and other precious metals, or “bling,” the value of which rises during inflation, the real benefit to the rich is in their home ownership. Their rent doesn’t go up, so homeowners benefit from inflation. Obviously, that’s not just the rich, and it’s another reason to buy a home.
Why Do Politicians Hate Inflation?
Since we average voters don’t like paying more for less groceries, inflation hits us psychologically. We believe our money is hard-earned rather than by gambling on the stock market. Having to spend more of our fixed income on gas and groceries means inflation hits the lowest earners the hardest, and we blame politicians. So rising inflation suggests a government is pursuing a poor monetary policy, and politicians don’t want that perception on their watch. We throw the bums out!
Economies either contract or expand, depending on the cycle they’re in. When an economy expands, it uses low interest rates to encourage borrowing and expand the money supply, so plenty of cash is around. It’s the opposite when a government uses monetary policy to contract an economy. A contracting economy uses higher interest rates and a smaller money supply to get inflation under control. Obviously, this causes a business slowdown, and the fear that comes with reducing inflation is that we’re going into a recession.
What’s Happening Now With Inflation?
Did poor monetary policy get us into the current inflation mess? By cutting interest rates, the government devalued a lot of financial assets, which can slow down an economy. The money supplied increased too dramatically. But perhaps the biggest problem has been supply and demand. There’s more demand than supply, resulting in higher prices.
Why does raising interest rates affect inflation?
What drives the prices of oil and everything else is supply and demand. if Supply outstrips demand, prices go up, and when prices go up across the board, with virtually all goods and services, you have an inflationary problem. If you can’t borrow money to buy more stuff because the interest rates have increased, you will quit spending money. That reduces demand, which reduces inflation. That’s the monetary policy the government is pursuing to get inflation under control. And it’s had a positive impact so far.
Supply and Demand
The slowdown in the supply chain has produced an increased demand for goods at a time when employment numbers are high and people are flush with money. Thus, they will pay higher prices for goods that can arrive on store shelves, so retailers raise the prices.
How to Capitalize on inflation?
Is this a good time to buy a house? While real estate is a great investment anytime, the conventional wisdom to buy low and sell high does not work while the economy is contracting. But if the economy goes into recession, you should start looking for real estate that has dropped to bargain prices. That’s probably the only way to capitalize on inflation in the housing market.
Savings Bonds or Treasury notes are a great place to be during inflation because when the rates the Fed sets go up, so does the interest rate paid on savings bonds. People have identified a general inflationary rate that has gone on for twenty years, and buying long-term bonds like I-bonds has proved a boon. The trick is knowing when inflation will be around for the long term and investing at the right time because bonds are long-term.
The gamble in this is right in front of our noses right now. While a generally inflationary pattern has been going on for the last 20 years, the Federal Reserve seems serious about bringing inflation down. Will it succeed? Will this end the inflationary pattern? If you guess wrong, you will lose money.
If you’re looking to the Stock market to invest during a contraction, stick to the rule to buy low when you can find bargains in the stock market. According to experts, a contraction is when you should watch for low-cost stocks and buy accordingly.
Some people buy gold during contractions because when the stock market value starts going down, the price of gold traditionally rises, so gold is considered by experts a good place to be during a recession.
Cryptocurrency is a currency that isn’t tied to any state or government manipulation, so when the dollar’s value is declining, cryptocurrency won’t decline. Many people believe it’s a good place to put your money.
How to Survive Inflation
There are several things ordinary people can do to alleviate the effects of inflation on their everyday routines.
- Cut everyday expenses
- Plan holidays and vacations more with an eye on cutting expenses
- Cut up your credit cards
These tactics reduce your “overhead,” for lack of a better term, in your everyday life. The “overhead” is your day-to-day expenses. By reducing your money on everyday expenses, you suffer fewer price hikes during recessions.
Cut Everyday Expenses
There are several ways to do this, from cutting luxury consumer items to discovering salvage grocery stores. Just figuring out how to start a budget will help.
Plan your holidays and vacations
Consider cutting expenses to beat inflation when considering your holiday travel and vacation time this year. Planning ahead should give you a leg up on expenses. Bargain hunters with patience can reap great rewards.
Cut up your credit cards.
During inflation, credit cards can seem like a resource to help you meet inflated expenses, but it’s a dangerous trap. Carrying a balance from month to month can become an onerous problem. Cut up your credit cards if you are tempted to use them to meet everyday expenses. That’s really the tell, using credit cards to buy groceries. That’s when you know you’re taking a wrong turn with your credit devices.
Instead, pay down your credit cards as much as possible.
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