Why is everything suddenly more expensive?
Whether you are trying to buy a house, a gallon of milk, or a gallon of gasoline, you are spending more than ever before. This is the unfortunate result of inflation. In fact, inflation recently hit its highest peak since 1982.
But what is inflation exactly? What causes it? And what can we do about it? Here are a few simple answers to these complex questions:
What is inflation?
Inflation is the increase in prices of goods and services over time. A rise in the price of a few goods and services is not considered inflation. Rather, inflation occurs with a GENERAL increase in the prices of goods and services throughout the economy.
When prices go up, your purchasing power decreases – as the value of each dollar decreases. Simply put…your money buys you less.
A certain amount of inflation is good and normal in the economy. But it becomes problematic when prices rise faster than wages increase.
Inflation is especially problematic for those on a fixed income, such as retirees.
What causes inflation?
Inflation is typically caused by events colliding with demand. In our current period of high inflation, we see this playing out.
The coronavirus caused manufacturing shutdowns, shipping issues, labor shortages, and general supply chain problems. All of these factors limited the supply of goods, which drove prices higher. Other recent world events have caused an increase the price of fuel, which not only hurts the consumer who needs to fill their car with gas, but also raises the prices of anything that is fuel-dependent, from an airline ticket to the cost of operating a lawn mower. As costs of supplies increase, the cost of doing business increases, and therefore businesses increase the cost of their services.
For example, if Steve operates a landscaping company, the increase in the cost of fuel means it costs him more to drive to his clients and to operate his mowers. To remain profitable, Steve must increase the price he charges customers. Higher costs for Steve means higher prices for customers.
What can you do to protect your income and assets during high inflation?
From buying stocks to purchasing real estate, there is plenty of advice out there to help you manage high inflation. But we believe the best course of action is to check in with your financial adviser, because the impact of inflation varies greatly depending on life stage and circumstance.
For example, because it has a devastating impact on the value of savings, inflation can be particularly difficult for those on the cusp of retirement, or those on a fixed income. On the other hand, for a young professional, high inflation may present a small speed bump on the road to wealth. In fact, slightly higher inflation can be helpful for those who owe money on a fixed interest rate.
The bottom line is that inflation impacts all of us…but not in the same exact way. Getting some solid advice can help ensure this period of temporary high inflation does not create a permanent problem for you.
Do you have questions or need advice for handling inflation? Reach out to our experts for more information at 610-422-3530.