Inflation - A Commerce Journey - Part 3 - Ep6

Inflation:

Continuation of Inflation P-2

In the last post we talked about inflation, the impact it has, what causes this phenomenon, and what the public thinks about this, we also brought in examples of in-game items to help understand this topic. We left off the episode by asking the public the question: "In your opinion, who or what should be held responsible for controlling inflation?", the people were given four choices with the option of picking multiple. The choices are The government, Central Banks, Businesses & Corporations, and Market Forces such as Supply & Demand. We finished the blog post by discussing how the answer would be all of the above and why.

Today we will be talking about possible steps people can take to safeguard themselves from the harms of Hyper-Inflation, What steps people have taken, whether inflation is going to Increase, Decrease, or Remain the same this year, and people's level of concern with respect to inflation affecting their financial security.

 

70% of the people have taken steps to safeguard themselves from the wrath of inflation with respect to their financial safety, which is a very wise decision. Some steps people can take to protect themselves from inflation are investing in the Stock-market which directly correlates with the market sentiment, it is directly proportional to what is happening to the country's economy, whether it's Hyperinflation or The Great Recession all over again. Some steps to protect yourself from inflation's impact on your finances include investing in:

• Stocks or ETFs: Electronically Traded Funds have a history of outpacing inflation making them a great choice to use as a shield from inflation,
• Real Assets: Consider investing in Real-Estate, commodities such as Gold, or treasury inflation-protected securities (TIPS),

You can also Increase Income & Skills:

• Side Hustles: Start Freelancing, investing, or even a small-scale business,
• Upskilling: Learning new skills to boost job prospects and salary growth,
• Passive Income: Considering rental properties, dividends, or digital products is a good option,

Reducing Debts & Expenses:

• Fixed-Rate Loans: Monthly payments stay the same no matter the state of the economy,
•  Smart Budgeting: Cutting unnecessary expenses and tracking spending,
• Bulk Buying: Stocking up on non-perishable goods before prices rise even higher,

Saving Strategically:

• High-Interest Accounts: Use savings accounts that offer high and competitive interest rates,
• Emergency Fund: Keeping 4-6 Months of expenses as a liquid fund,
• Minimize Cash Holdings: To avoid losing purchasing power reinvest any extra liquidity,

Be Resource Efficient:

• Reduce Utility Costs: Using energy-efficient appliances and solar energy
• Limit Fuel Costs: Using public transport, carpooling, switching to fuel-efficient Vehicles.

Here are the points we discussed and how people have already implemented them into their lives, a small percentage of people integrated all the above choices; Reduced Spending, Different Investment Strategies, Creation of Additional Sources of income, and Buying of assets such as Real Estate or Gold.

A surprising 20.6% of people replied with the answer No, this move puts your future financial stability at so much risk you are essentially on a cliff waiting to collapse.

The above question comes with some uncertainty, this is because people are unsure as to what will happen to their country's economy, whether the inflation will reduce or increase, This can be viewed in many ways from different situations as if we were to answer this question from the perspective of a person from a country with a healthy growing economy such as India, with stable growth in the Gross Domestic Product (GDP) around 6.5% being the estimate for 2024, making it one of the fastest growing economies in the world! In this Perspective, we need to understand the Advantages of inflation and why it is necessary for the growth of a nation. We also need to understand the impact it has whether it is negative or positive.

The Pros And Cons of inflation for a country:

Pros of inflation for a country:

1. Economic Growth: A Moderate Inflation level can be considered a good sign for an economy because this indicates increased demand for goods and services which boosts productivity and cash-inflow.
2. Better Wages: Inflation helps workers receive regular raises in pay, maintaining a high standard of living.
3. Stimulates Investments: Inflation results in investors investing in real estate, shares, bonds, etc. They actively seek out investments which outpace Inflation.
4. Reduces Debt Burden: Inflation can reduce the burden of debt as it makes it easier for borrowers to pay back money on loans with fixed interest rates. 
5. Increases Spending: It promotes the purchasing of good as the money ends up having less purchasing power in the future which leads to consumers spending more money which stimulates the economy.
6. Boosts Output and Productivity: Companies may increase output and productivity to achieve maximum profits when prices are high.
7. Better than Deflation: All experts say that inflation is easier to manage as deflation can lead to economic crises such as recessions.
8. Adjustment of Relative Prices: Moderate inflation makes it much easier to adjust relative prices, in-turn helping countries regain competitiveness without having to turn to deflation.
9. Home Equity Growth: Inflation can increase the values of homes, directly benefitting homeowners.
10. Economic Stimulus in Recession: Targeting higher inflation rates during recessions can help stimulate economic growth.

Cons of Inflation for a country:

1. Erodes purchasing power:  Inflation reduces the purchasing power of money which affects the consumer's ability to by goods and services.
2. Uncertainty and Reduced Investments: High inflation can lead to uncertainty between investors, discouraging investments and slowing economic growth.
3. Fall in Value of Savings: High inflation erodes the value of a person's savings, especially when the interest rates of the account do not keep up with inflation.
4. Possible Recession: Excessive inflation can lead to a recession if demand outpaces supply, causing prices to surge and the spending to decrease.
5. Inequality: Inflation can widen the gap between individuals in an economy, those with fixed incomes and savings will see a decrease in purchasing power.
6. Distorts Relative Prices: Inflation can distort relative prices, salaries, and rates of return, leading to economic inefficiencies.
7. Higher Costs for Businesses: High inflation can increase costs for a business which makes it difficult to predict and budget properly.
8. Impact on Public Services: Inflation can squeeze public services as budgets may not keep up with the actively rising costs.
9. Exchange Rate Volatility: High inflation often leads to a weaker currency, it makes imports much more expensive and it increases inflation further.
10. Negative Impact on Benefit Claimants: High inflation reduces the real value of benefit payments which affects low income households.

Key Facts:

• Optimal Inflation Rate: Many economists advocate for a healthy inflation rate which is around 2% annually which is considered a healthy economic growth.
• Impact on Debt: For example, If the inflation rate is 3% and the nominal interest rate on a loan is 5% then the real interest rate is 2% as (5%-3%=2%).
• Effects on Assets: Inflation can increase the value of tangible assets such as Real estate and commodities directly benefitting the ones who own them.
• Global Inflation Trends: Inflation rates have been elevated globally since 2022, partly due to the COVID-19 pandemic and geopolitical events such as the Russian-Ukrainian Conflict.

Inflation poses a significant concern for a person's financial security as it erodes the purchasing power of their savings, it complicates long-term financial planning. High inflation can lead to events such as economic instability, affecting vulnerable groups such as retirees and those living on fixed incomes disproportionately. It requires individuals to save more aggressively and adjust investment strategies to maintain their standard of life. As inflation rates fluctuate, understanding its impact is crucial for making informed financial decisions and ensuring financial stability.