By: Lizzie Letsou
What is inflation? Why are prices rising because of it? Why is it even happening in the first place? If you want to know all about inflation and how you can cope with it, keep reading! Trust me, Nav.it and I’ve got you covered.
So…what even is inflation?
Okay, this can be a little tricky if you’re not an econ major — but just bear with me!
I’m first going to give you the simplest possible definition of inflation: inflation is a rise in price levels. So, when inflation is high, so are prices.
But that’s not all there is to it. Strictly speaking, inflation is the measure of the rate at which prices of goods and services are rising in an economy. If the prices of those goods and services rise (because of production costs, raw materials, wages, etc), then inflation can (and often does) occur.
Additionally, if there is an increase in the demand for goods, then inflation can occur because consumers are simply willing to pay more.
The good, the bad, the inflated
You might be thinking: is inflation good for the economy? This is a bit of a tricky question and the answer really depends on who you ask.
Inflation often benefits companies that want to charge more for their products. Moreover, many view inflation as a positive phenomenon when it helps boost consumer demand and consumption (this can also spur economic growth).
On the other hand, many view inflation as a negative phenomenon because it erodes the value of cash. Furthermore, it limits the amount consumers can purchase with currency. And, of course, inflation can lead to higher prices for basic necessities (food, healthcare, clothing).
Inflation also tends to exert a domino effect on the economy, meaning that once initial inflation occurs, it’s likely only going to continue to rise, which is concerning for both businesses and consumers.
How is inflation controlled?
Basically, inflation is both a good and bad thing. Rising prices can help bolster the economy but can also take a toll on the average consumer’s wallet.
Thankfully, most central banks of developing countries monitor inflation. For example, the Federal Reserve in the US sets an inflation target of about 2% — this ensures that prices don’t rise too much or too quickly.
Unfortunately, over the course of the past year, inflation rose to a mighty 5%, which is extremely unusual in the US.
But why did this happen now? And should you be worried?
Firstly, it’s important to keep in mind that this rise in inflation has a lot to do with the pandemic. (I know, I’ll refrain from using the p-word going forward!)
According to the Labor Department, inflation rose 5% from May 2020 to May 2021, marking the biggest jump since 2008 (the Great Recession). The reason for the spike is simple: the whole country was on lockdown last year, meaning that airlines and hotels were shut down, employees were laid off, and prices were down.
Now the economy is finally opening back up (yay!). And people are traveling again, leading to a 10% increase in hotel prices, and a 24% increase in airfare.
(Want tips for saving on travel? Check out this article.)
While rising prices doesn’t sound like a good thing, I promise you it’s not that bad either. In fact, many economists believe that these price hikes will be short-lived and, eventually, the economy will adjust completely. In other words, the situation appears to be under control, especially since the inflation spike is mostly due to the reopening of parts of the economy that were closed down during the pandemic.
However, if the situation continues to get worse, the Federal Reserve will raise interest rates in order to prevent further inflation. We are currently in an unprecedented situation, where the demand for many goods and services (which were unavailable for an extended period of time) is increasing again at a rapid speed.
Even though many would categorize this situation as a “yellow-light” one, it’s still pretty tough.
With prices for rent, food, and transportation increasing, many people are struggling to make ends meet. And anyone who spends most of their income on basic necessities is likely being hit the hardest. Small businesses are also concerned about adjusting prices.
So, we are going through a bit of a rough patch, with many Americans being forced to cut corners and make difficult financial decisions.
Nav.it’s here to help you cope
If you’re also concerned about inflation and how it’ll affect your day-to-day life, you’ve come to the right place. Nav.it and I will help get you through this. (Hey, you survived a year-long pandemic, a little inflation’s got nothing on you!)
I’m going to give you a few tips on how to get through this spike of inflation — and I’m also going to walk you through how to use Nav.it to improve your financial well-being.
If you’re looking to insulate your savings from the effects of inflation, investing might be your best bet. Rather than letting your money sit in a savings account, you can grow your personal wealth by investing in a diverse portfolio of stocks and bonds.
And, honestly, the sooner you start, the better! That’s because the returns from investing will only grow over time. Time is an investor’s best friend!
In addition to investing in stocks and bonds, make sure you invest in yourself during this time! Coping with inflation isn’t merely about making smart financial choices, it’s also about taking care of your mental and emotional well-being.
Lucky for you, Nav.it not only emphasizes growing your literal wealth, but also your personal, psychological wealth.
Fixed rates are your friends!
Here’s another thing to keep in mind: when inflation is high, fixed rates are your friends. Fixed interest rates ensure your regular payments won’t rise with inflation. In other words, fixed rates keep your interest commensurate with your actual savings.
So, if you’re looking for a savings account or a future investment, make sure you find something that guarantees fixed interest rates.
All about those assets
Having concrete assets will also help improve your financial security during high inflation periods. For example, owning a property is a great way to ensure you have a concrete asset.
Investing in real estate is often seen as an “inflation hedge investment” because the value of homes will likely only increase or maintain value over time. Thus, purchasing real estate could help you fight inflation because of its appreciation.
If you fail to plan, you plan to fail
Always have a plan (and a Plan B and C!). Budgeting wisely and creating an emergency fund will help you be prepared for anything. Thankfully, Nav.it makes the process of budgeting and saving easier than ever!
You can use the “Budgets” feature to create and categorize your spending. You can also use the FDIC insured “Auto-Save” feature, which allows you to save money automatically!
You have so many financial tools at your fingertips!
One of the easiest ways to combat inflation is to minimize any frivolous spending. Inflation can often have an immediate impact on prices, which will certainly take a toll on your budget if you’re not careful.
Here are a few easy examples of how you can start saving money: carpool or use public transport to save money on gas, look out for low APRs (annual percentage rate), and be strategic about credit card usage.
Financial literacy is the greatest tool!
While you can’t prevent or change inflation spikes yourself, you can take control of your own financial situation using the tips I gave you in this article. Being financially literate is the greatest tool in your toolbox! So keep learning and growing! Nav.it’s here to support you every step of the way.