Photo courtesy Issac Smith on Unsplash.
Inflation is the increase in the price of goods and services in an economy. It is the increase in the price of everything around you due to the decline in the value of money. At the moment we are seeing the price of all the goods around us increasing. There are a few causes of inflation today. The disruption of the supply chain due to the Covid-19 pandemic, the spurt in the price of crude oil, and the unexpected Russia – Ukraine war have all contributed to the rise in prices of essential consumption items.
The three main causes of inflation are demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation is the upward movement of prices due to the shortage in supply which is like too many rupees chasing too few goods. Cost-push inflation occurs when the cost of producing goods and services increases and this forces the businesses to increase their prices. The built-in inflation happens due to the wage spiral which occurs due to the higher demand for wages by the workers to keep up with the higher living costs. The businesses then have to increase the prices to keep up with the rising wage costs.
High inflation is bad for the economy but very low inflation is also not good for the economy. Therefore the economists suggest a path of low to moderate inflation.
In the last year, we have seen the price of everything rise. Be it the fuel price, the price of wheat, rice, biscuits, fruits, cooking oil, and paper. The increase in the price of daily consumable items has started to affect the middle class and the poor people. The price of commodities like steel, copper, aluminum, and plastic have also risen which has led to a rise in the prices of consumer durables. Construction costs for houses have gone up and eating out in the hotels has also become expensive.
With the increase in expenses, there is much less left for saving and investment. And the worst part is when people take loans to fund their expenses or go on online shopping for things or items they don’t require immediately. Soon they find themselves neck-deep in debts with lots of worries when they are unable to clear their loans.
The high inflation has engulfed most of the countries in the world and the central banks are doing their best to bring the inflation under control by raising the interest rates. The FED is doing it in the USA and the RBI is doing it in India. But all these measures will take time to bear the results. For the time being the individuals have to manage their salary or the business earnings. Since they can’t control the economy they can take certain decisions and do things that are in their control.
The best thing that a person can do is prepare a budget and try to stick to it. Discretionary expenses like going on an expensive holiday or buying costly drinks can be curtailed. Some of the discretionary expenses can be postponed. The savings and investments should go at the same pace as before and this will help to fight inflation in the future too. Now is the time when the budget requires more attention and sticking to it would keep the finances in good stead.
- Make a food spending plan. You may be used to eating out 3-4 days a week and it is better to reduce eating out to save on money. Many of the persons prefer to eat outside during the office lunch time. Taking food from your home and having it during lunchtime will cost less and would be healthier too.
- Reduce the consumption of non-veg items as these are much more costly than fresh vegetables. If you are getting canned fruits and vegetables swapping branded names with the generic version will save you some money. The next thing you can do is try to buy food items in bulk as the bulk price always comes cheaper. This will also save you money. Instead of ordering fresh ingredients regularly try using the ingredients that are already there in the kitchen.
- The fuel prices have increased rapidly since the pandemic. If you are going to your place of work by car, the best thing is you can do carpooling and share the cost. This will save on your fuel expenses. Waking a distance of a few kilometers daily is good for your health and if you are going shopping nearby instead of using the car, try to walk the distance. Along with saving the fuel cost, you will become more fit.
- During inflation, your expenses have increased but your salary may remain the same. It is good to remind your boss during the appraisal when the topic of the annual raise comes up. If they agree it is fine otherwise you can start looking for a job with higher pay. The other thing is you can request flexibility from the job like more days for work from home. This would decrease your traveling expenses as well as the cost of eating outside meals.
- There are things that you can delay buying. These can be expensive clothes, shoes, appliances for the house, and other things that require a big investment like a car. Delaying the purchase of these items will leave you with more money for immediate needs.
- Many people like to keep money in their savings bank account which doesn’t give a high rate of interest. Some of the debt or money market instruments carry a higher rate of interest so it is better to shift the money there.
- To be better able to fight the inflation in future it is good to park your money in equities or mutual funds. The returns will increase making your financial life comfortable.
Due to inflation many of the basic things like food, transportation, and housing become costlier than before and the monthly expenses increase. It is good to eliminate or reduce the discretionary expenses and also try to reduce the fixed expenses. Check for the items whose prices have spiraled more and try to avoid buying those things. Try to be frugal and this would bring the expenses under control.