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Tightening the Belt for High Inflation

Posted by Advocate Debt Relief Team

1 month ago / May 23, 2022

Inflation is the highest it’s been in quite some time. Between 2020 and 2021, the average price for a gallon of milk rose 6.9%. Today, we’re seeing prices greater than last year. Many of us are concerned, “When will it stop?” An even more pressing question is, “How high will it go?”

No one truly has the answer to that question, but we can better understand how inflation occurs, what it looked like in the past, and where we can make changes to tighten the belt in case it presses on for a while.

The Cause

The root of inflation is caused by excess demand. Typically this means we have a healthy economy because people consume goods with their cash on hand. The rising demand causes a strain on supply which inflates prices more than usual.

Two kinds of inflation exist — Cost-Push Inflation and Demand-Push Inflation.

  • Cost-Push Inflation occurs when the input costs or materials used to create a product have raised, and the extra expenses are pushed to the consumer.
  • Demand-Push Inflation transpires when the demand increases, but supply can’t keep up.

Today’s economy is an inadvertent result of two key factors, one of them is called the wealth effect. In response to the pandemic, many governments injected money into the economy. This enabled people to continue consuming needed products when working from home wasn’t an option. The other key factor that worked in tandem with government-inserted funds was shutdowns. Many businesses and factories were being required to shut down during the pandemic. Ultimately this impacted the number of products on the market to consume.

A whirlwind of other factors has contributed to today’s high inflation, but more money with less product became the result. Reading through the headlines can feel intimidating at best. There have been no clear answers on what the future looks like, and it’s increasingly harder to buy that gallon of milk by the month. We can look at history to better determine decisions for our future.

Historical Inflation

Over the last 35 years, when the Federal Reserve raises interest rates, it tends to tame inflation. Recently, the Federal Reserve raised interest rates by half a percent. It might not sound like much, but it can significantly affect the market. Higher federal interest rates make loans or credit more expensive, but saving money in your bank account becomes more profitable. Interest is earned on cash sitting in the bank, which allows you to make more. The hope is that spending habits will change; fewer people will borrow money while more people will save money.

In the early 1980s, inflation had been climbing steadily since the mid-1960s. The Federal Reserve at the time raised mortgage rates to a whopping 18%. People making any significant purchases that required a loan was quite upset. Although painful, by 1982, inflation rates began to taper down, and interest rates started to level off.

Many economists say that our current situation is a repeat of the 1970s when inflation will consistently be high for at least the next two years. If this is true, it has a painful impact on the average consumer. Generally, economists recommend staying away from big-ticket items like a home or car purchase and avoiding ramping up loans. If you’re going to invest, make sure it’s financially comfortable. Overextending your resources right now isn’t a good idea.

Where to Buckle Down

If you’re looking to get ahead of the inflation curve, it’s essential to assess your current situation honestly and intimately understand where your money is going. If every dollar isn’t accounted for, you’re sure to feel the pinch.

One way to keep your money safe is a fixed deposit account, otherwise known as an FD account. Banks and non-banking financial companies offer this option as a tool to get a fixed interest rate. Typically these accounts can be set up for a period from 7 days up to 10 years. You get a lump sum with interest at the end of the period.

Maybe extra money isn’t available, but you need a new appliance or medium ticket item. Buy now, pay later (BNPL) might be a good option. This type of installment loan divides your purchase into multiple equal payments. The first payment will be due at check out, and the remaining ones are billed to your debit or credit card. As a general rule, if you’re already struggling to make debt-based payments, steer clear of this option. It’s easy to overspend this way, and it’s best not to tempt yourself.

Cashback credit cards are a good option, only if used wisely. Equally a slippery slope, this can be a tempting overspending tool but works to your advantage when the balance is paid off every month. Stay away from spending more than you already have; pay down the monthly balance, and end up with more cash than you’ll spend. One excellent practice is to purchase groceries within your budget parameters and pay them off.

Debt may be the biggest obstacle, and inflation has only worsened your situation. All too often, stress can get in the way of clear thinking, preventing a masterful plan from moving forward. If you’re in this boat, contact Advocate Debt Relief. We’ll go through your options and help you navigate our high inflation economy.

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Filed Under: Budgeting