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January 23, 2019

5 Ways in Which Inflation Impacts Your Life



When a country experiences inflation, the prices of goods and services rise. Economists know that inflation is both good and bad. It is good when it is mild and a driver of economic growth and bad when it is high and it slows growth. Since our lives are tied to the economy, the ripple effect of inflation reaches us in one way or another. Here are five ways in which inflation impacts your life:



Effect on Retirement Planning

Inflation has a negative impact on peoples’ retirement payments. If the rate of inflation is high, the value of your retirement package will depreciate. The savings remain steady throughout your retirement. Therefore, if the value of money falls, you will afford fewer goods and services. Your standard of living will be lower than you had anticipated.

The best way to avoid the ill effects of inflation is through better retirement planning. This means that if you are planning for retirement, keep the target amount that you raise high. Start saving as soon as you start earning so that you can accrue more returns in form of interest if your plan allows it.

A disparity in Asset Valuation

Inflation affects the value of different products in various ways. For instance, while commodities like petroleum products witness price hikes, your home could be losing value. The prices of stocks and bonds are affected in different ways too.

This was evident during the Global Financial Crisis of 2008. The value of homes plummeted but gas prices reached unprecedented levels.

Taking the example of the 2008 crisis, people who owned cars and houses were affected in the following ways:

  • Driving to work was an expensive affair due to the prohibitive gas prices. Carpooling and public transport were the alternatives you had to consider.
  • People with fixed-rate mortgages benefited from inflation. The value of the mortgages due decreased.
  • People with variable-rate interest rates on their mortgages still hit harder times especially if their incomes did not increase at a rate higher than the rate of inflation.

Lower standards of living

Peoples’ standards of living suffer the most in an inflationary period. If the prices of goods and services increase at a rate higher than your income does, your spending power will be lower. You will not afford the life you could during the good times – a period of excesses and luxury.

When the rate of inflation is high, the following things tend to happen:

  • Government slashes spending (including welfare programs). A period of austerity only worsens your living conditions.
  • Prices of essential consumer goods increase in price. They take up more of your income leaving little for other expenses.
  • You cut down on spending. Discretionary expenses that make the quality of life better become unaffordable. For example, you may be forced to move from a comfortable house to a smaller, less comfortable one.

Cumulatively, life becomes tougher and the only way to survive is by either minimizing spending or borrowing money to maintain your living standards. Borrowing is unsustainable unless your income increases fast enough to help you repay your debts.

If the rate of inflation is too high, it is called hyperinflation. During a period of hyperinflation, prices become extremely high and you may spend your entire income on basic needs.

Slow economic growth

Economic growth is dependent on two important factors:

  • Spending
  • Borrowing

When spending is high and borrowing is high (low interest rates), the rate of production of goods and services goes higher and, as a result, the economy grows.

When the rate of inflation is high, spending power decreases and borrowing is undesirable because:

  • Interest rates increase as the Central Bank tries to reign in on the amount of money in circulation.
  • Spending power, both by the government and by the consumers is lowered by the high prices relative to income.

With these mitigating factors, the rate of production decreases. Fewer products relative to demand push the prices even higher resulting in a vicious cycle.

Therefore, if you are forex day trading, inflation is one of the most important factors to track. Governments sometimes try to manipulate currencies to alleviate the situation and this can help you determine where to hedge your bets.

Political Instability and Uncertainty

Inflation affects the politics of a country. During tough times, politicians aspiring to be elected promise to tackle inflation. With the wrong economic policies, their failure creates uncertainty. People demonstrate to topple their leaders. On top of that, people also unionize to demand pay rises to make lives more manageable. However, these pleas go unanswered because the government and other employers can’t afford to increase spending. It is always a period of turbulence.

Conclusion

Inflation influences all aspects of life. Since everybody relies on goods and services in one way or another, inflation is felt by everybody – either negatively or positively. The best thing to do is to plan for it. If you are saving for the future, pay attention to inflation.


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