Inflation Explained, How we got here and what to do now!

Some months back, someone lamented on how the price of toothpaste was now $5. I get snaps from friends showing outrageous prices for chicken at Superstore or other low saving grocery stores. Or my personal favourite, the Tiktok and Reels of how much groceries you could buy for $50 a year or two ago compared to how much that can get you now. Everything is now more expensive and that’s mainly caused by Inflation. 

Simply put, inflation is the increase in prices of goods and services. It means a dollar today is not able to get you the same thing(s) as a dollar last year. You need more money to live as comfortably as you did a year or two ago.

Inflation isn’t all so bad but high inflation negatively affects how much we are able to spend, save and invest. 

From this example, it is clear that inflation has a negative impact on Ashley’s savings and investments and overall quality of life. If she has debt she is trying to pay off, an increase in her living expenses might not allow how to do so which is what a number of people are facing right now.

Okay I get that, so how did this happen and why are we experiencing inflation?

Firstly, I’d like to point out that inflation is a very normal theory and concept in Economics. A healthy economy is categorized by low inflation (read anything under 2%). In Canada, The US, UK and the EU, inflation now ranges from about 5% up to 9% depending on the country. This means your expenses are now up by 5%-8%. 

Consumer price index is one of the measures of inflation. 

In my opinion, we are experiencing the after math of the COVID 19 pandemic. Here are some ways that has caused high inflation: 

  • Increased demand from consumers: In 2020, when we were all locked indoors and couldn’t go outside, we got the opportunity to save more and had more money in the bank. At the same time, suppliers had to cut back on their production because we were in a lockdown. Demand from consumers went up because they had more discretionary income however suppliers had limited inventory because they were not able to produce as much as they could previously. In economics, an increase in demand causes the prices of goods and services to go up when there isn’t a change in supply. Increasing demands and low supplies meant the prices of goods would go up. 
  • Supply chain issues: The pandemic also made it difficult for things to be delivered and transported as easily as they used to be. What this means is that it now costs manufacturers and suppliers more to get those goods or services delivered to you and I. Since they can’t bear those costs alone, they pass on some of the costs to us through price increases. 
  • The war in Ukraine, sanctions against Russia and an increase in gas prices: This is how this is playing out- Russia supplies gas to the UK and EU but since the war in Ukraine started, they are unable to because the UK and EU don’t want to buy gas from Russia which means they have to get their gas supply from somewhere else. This puts a strain on the global cost of gas. Higher gas prices affects our wallets as we have less money to spend on other household items.
  • Low unemployment: Most ‘developed’ economies are experiencing low unemployment which means it is now harder for employers to hire people. This makes it expensive for suppliers (especially for service based industries) to operate business as normal. This leads to another price increase. 

Alright, that’s enough bad news, what can I do?

  • Adjust your budget accordingly and cut down on things you do not need 
  • Save as much as you can: The government uses an increase in interest rates to bring down inflation. Over the next few months, you might be able to get a more favourable interest rate on your savings. Adjust your emergency funds for inflation.
  • Look for additional sources of income: check out this post for side hustle ideas and additional sources of income. 
  • Make sure your money is working for you: Inflation devalues your dollar. Say you saved $100 last year and kept it under your bed or in your wallet (or a chequing account). The $100 note you see today has less value than it did last year when you had put it aside since it can’t get you as many goods or services as it could last year. This means you also want investments that yield returns that would beat inflation. 
  • Think longterm and don’t stop investing! 

That’s it from me! What are some tips you are using to manage inflation?

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