What Is Inflation and How Does It Affect You

As of June 2022, inflation in the United States has peaked at the highest rate in the last 40 years, which has climbed at a 7.9% annual rate, according to Labor Department data. Inflation happens when the prices of products and services suddenly rise — when it increases at unexpected rates, it can disrupt the balance of the economy and also your finances. 

However, if you think that inflation doesn’t affect you, you will need to reconsider. Failing to make preparations in times of inflation is one of the biggest mistakes Americans make. 

In this article, we will share everything you need to know about inflation, how it affects you, and how you can protect yourself and your family from it.

What is Inflation?

Inflation refers to the speed or rate when prices change; when inflation rises, it means that you need to pay more for the products and services you usually purchase. While this can help through the inflation of income or assets such as stocks or housing, you will need to own that asset before the prices rise.

Moreover, if your income can’t keep up with the pace of inflation, you will have less buying power. As a result, inflation will increase the cost of living, and if it gets too high, it can even affect the entire economy.

When prices rise, it may be an indication that the economy is growing fast; however, when people purchase more things than they need, suppliers won’t be able to keep up.

At the same time, wages will also fall behind and will result in everyday products and services with ridiculously high prices that people won’t be able to reach. 

How Does Inflation Happen and What Can Cause it?

When it happens temporarily, high inflation could be the result of a thriving economy — where people may have a surplus of cash or have access to plenty of credit and are looking to spend. If customers are eagerly purchasing products and services, many businesses could raise their prices if there aren’t enough supplies. 

Companies can also charge their consumers more after they realize that they can keep their customers even if they raise prices on their products and services.

However, inflation will often increase and decrease based on other factors that have little or nothing to do with the condition of our economy. Problems in company supply chains may lead to limited goods which will pump up prices, while limited production of oil can make gas prices skyrocket. 

Unfortunately, the burst in inflation happening today has been caused partly by demand and partly by oddities. When we say oddities, we mean how the coronavirus has caused delays in shipping and has shut down all kinds of factories, companies, and businesses, which has pushed prices higher.

However, in the case of demands, there have been consumers who have all built up their savings in the past few months. When this is combined with the many stimulus checks from the government, many have been spending on various goods where their high demand is causing some of the inflation we see. 

People continue to make purchases and are also willing to keep up with the rising home and rent prices. Because of our unceasing shopping, we are inadvertently helping to keep prices on the rise.

Types of Inflation

The root of inflation comes from times when we experience an increase in our money supplies; however, this can vary from the various mechanisms in our economy. The supply of money within a country can be increased through the following: 

• The legal reduction or devaluing of the currency’s value.
• Printing money to be given away to citizens.
• Loaning new money by purchasing government bonds to be used as account credits through banking systems — the most common method of increasing money supplies.

However, in each of these cases, the value of money decreases, and it loses buying power. The mechanisms that drive inflation are classified into three kinds: 

• Cost-push Inflation: This happens when production costs in various sectors and industries increase. This includes increases in the prices of input, such as raw materials and labor, which then increases the overall price of a product. 
• Demand-pull Inflation: Happens when the consumer demand for products and services is higher compared to the capacity to produce them. Because of the huge gap between supply and demand, there will be shortages that lead to an increase in prices. 
• Built-in Inflation: This occurs where there is an expectation of inflation in the future — raising prices on purpose will result in higher wages to help citizens afford the high cost of living. However, this also means that there will be an increased cost of production, which will affect the price of products, creating a cycle that never ends.
  
  
  

How Inflation Affects the Consumer and the Economy in General

There are many ways in which inflation can affect your finances and life, but some ways are more common than others, such as: 

1. There aren’t enough supplies to keep up with the demand - When the value of the dollar decreases, some people will try to “beat” inflation by stocking up and hoarding essential goods. If supplies aren’t able to keep up with these demands, this increase will lead to shortages and can make it difficult for others to find these necessities. Another downside to this is that the increase in demand will push prices even higher for everyday items.
2. The cost of living will also go up - Inflation can raise the prices of all kinds of products and services. Depending on your budget and spending, these increases may put a strain on your wallet. For instance, the overall inflation in February this year was 7.9% higher than last year. As a result, energy prices have dramatically increased by 25.6% during this time — this was mainly driven by gas prices, which have risen by 38%. Those who need to go on long commutes to get to work and other places will be the most affected by the increase in gas prices compared to those who work from home. Moreover, food prices have also increased by 7.9%, which has also contributed to a significant change in how people spend their money.
3. An increase in job opportunities and wages - Inflation can also create more demands for products and services, which means that retailers, manufacturers, and various companies will need to increase wages and hiring to keep up. As such, it could be a good time to hunt for a higher-paying job or to ask for a raise during times when inflation occurs. But before you do this, be sure to do your research first, because the effect of inflation will vary based on the industry you’re in.
4. There could be a rise in interest rates - The Federal Reserve can help to keep inflation regulated by making adjustments to the rate of federal funds — the rate at which banks make payments for lending money to each other. This can be used to influence interest rates in the short term, which includes the primary rate that lenders use to determine the rates for those who wish to borrow money. As such, lenders can increase the interest rates for various kinds of loans. So if you’re looking to make a large purchase and are thinking about applying for a loan, do research first to see if it will be a good match according to your needs and situation.
5. Those on a fixed income may find it harder to adapt - If you live on a fixed income like Social Security, it may get even harder for you to adjust to inflation. While you may get increases in payments that are designed to help you keep up with inflation, these may not be enough to sustain your current lifestyle, especially when inflation rates are high. For instance, during December 2021 benefits from Social Security payments rose by 5.9%. However, with the climbing inflation, this addition may not be able to cover the steady rise in expenses.
6. You may see lower returns in short-term investments - If you have a high-yield savings account that provides an annual percentage yield of 1%, you won’t be able to earn enough to fight against an inflation rate of 3%. However, it might still be a smart idea to create a savings account for your short-term essentials, such as a down payment for a home or for emergency funds.
   
   

Tips on How to Protect Yourself from Inflation

Thankfully, there are a few strategies you can use to help shield yourself from inflation, all of which you can start today:

Invest in Stocks

While some people don’t have much confidence in stocks, having shares and owning equities can actually be very helpful in combating inflation. The best kinds of stocks to own when there is inflation are companies that have the means to naturally increase their prices during these times. 

An example of this is commodity resource companies, where products like grains, oil, and metals can be priced higher when inflation occurs. This is because the prices of these items will tend to get higher compared to the price of a laptop, which is controlled by distributor and manufacturer price adjustments. 

You can also look to invest in healthcare companies or commodity firms which will tend to have large profit margins and will generally have the lowest cost in production. Moreover, you shouldn’t underestimate the value that dividends have when there is inflation, which may increase the total return of your portfolio.

Invest in a Home

As long as you do it for the right reasons, investing in a home you will live in can be a great investment. However, if your goal is to purchase a property to flip it and sell it for a profit, this may not work out as you intend and will likely encounter problems. 

If you’re a homeowner and won’t be paying in cash, you will likely need to put some money down and then take out a loan to pay for the rest of the purchase price. There is a wide range of mortgages, such as adjustable and fixed-rate, which are the most common.

In both options, you will need to pay off the principal every month while you occupy the house until you get full ownership of a debt-free asset that will increase in value over time. However, if you choose a fixed-rate mortgage, you will end up paying your future debt through cheaper currency should the rates increase. 

On the other hand, if rates decrease, you will still be responsible for paying the whole fixed amount. As such, you will need to take all the various factors into account to ensure that you choose the best mortgage option for you.

Invest in Yourself

This is by far one of the best investments you can make to ensure that you are prepared during uncertain times — investing in yourself will help increase your earning power in the future. You can get started by learning more and getting a quality education, which you can then continue by keeping up with the latest skills you may need in a future workplace. 

You can do this by staying on top of your business's changing needs, or by learning new skills if you intend to switch careers. Consistently building up your knowledge and skills will ensure that your career is both inflation-proof and recession-proof while helping to get a higher salary.

Conclusion 

Inflation doesn’t just affect an economy but also everyone who is a part of it. By learning how it affects us and how we can protect ourselves from inflation, we may be able to keep up with relatively small changes in our lives. 

However, it is up to each of us to find a way to adapt to these difficult times. Luckily, 121 Financial Credit Union in Jacksonville, FL, can help you fight against inflation through various channels. 

Whether you want to open a new bank account, loan money for a new home, invest and plan for retirement, or want to protect your existing assets, 121 Financial Credit Union is here for you. Start your fight against inflation by calling us at (904) 723-6300 or visiting our website today.