Let’s look at a common assumption about inflation that we read in the financial press. Let’s call it conventional wisdom.
The story as frequently repeated in the press is that if inflation is say, 4%, and Social Security benefit rises, say 4%, then no one is better off, since any rise in benefit is eaten by the rise in prices.
Truth?
While this may be true mathematically, it is not necessary true for everyone.
Firstly, inflation affects people differently. Officially, government measurement of inflation is based on various indexes that use a “representative basket of goods and services” for consumers.
The goods and services you use may be, or are definitely are, different than those in this representative basket. So as a result, you may experience more effects from inflation, or less. It depends.
In many cases, many consumers are subjected to a significantly higher rate of inflation than is reported in the press.
Another aspect not taken into account by the conventional wisdom assumption is that a rise of benefits may give the beneficiary breathing room to accommodate some money-saving activities or product substitutions. That in turn may temper some of inflation’s effects.
Certainly
Certainly, no one likes to be in the receiving ends of inflation, especially at, say 4%, or even more. Inflation in effect debases the currency.
What To Do
Those that “run” the economy are said to be doing what they think is right. Interest rate increases may or may not do the job to control inflation. Our part is mostly to take of ourselves. The way to take care of ourselves is to be prudent and judicious with our money. With all the talk of recession and a possible economic slowdown, it is appropriate to be cautious on spending. The obviousness of recent inflation makes financial survival paramount.
The Individual
One of the results of widespread consumer product inflation is often a reduction in consumer spending. When I see product price increases as we have seen recently, one of my first reactions is to spend less. We make things last longer, we buy other less expensive products or delay large ticket items. The assumption is that conserving cash hopefully will allow me to prevent all my cash from being spent. At the same time, increasing inflation means higher interest rates for savers. So for this case, having cash is a good thing.
Sadness
Of course, inflation is depressing. It is frightening. The debasement of the currency that is inflation causes fear and sadness. And this sadness turns to frustration which turns to anger. So we can say inflation is one of the major possible societal irritants.
Academic
According to standard economic theory, inflation is caused by too much money chasing too few goods. Namely. the supply of money and the supply of what can be bought with this money should be in an appropriate balance. Any major imbalance one way or another upsets the economy.
Since the theory of inflation revolves around too much money in circulation, the treatment for inflation is supposed to be to reduce the amount of money in circulation. This is done by raising interest rates. Since interest rates are seen as constricting or broadening economic activity, inflation, by this definition, could be managed.
Unfortunately, the approach often taken on managing interest rates can be extreme in one direction or another. Now in our current inflationary environment despite interest rate increases, thus far we have yet to see major changes to inflation. It is possible and even likely that further rate hikes will occur. Major rate hikes are not benign, businesses and consumers are all affected.
As companies that may find their business curtailed by the affect of interest rate hikes often layoff employees, it thought this will happen at large scale if inflation is not brought under control.
Being prepared for a possible layoff is the appropriate path. It is best to build cash reserves, reduce or eliminate debt. Reduce consumption. Upgrade one’s skills. Attempt to makes oneself irreplaceable. And so on.
How are your preparing for the inflationary environment? Let me know here.
The unguent bottle (also said to be an amphoriskos) displayed is from Egypt, New Kingdom, Dynasties 18 (1540-1296 BC). Courtesy Cleveland Museum of Art.
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