What inflation means for you and your money
Inflation isn’t just a problem for bankers. It shrinks your salary and your savings. Here’s how you can beat it.
Inflation is rising all over the world. But this isn’t just a problem for bankers, governments and retirees to worry about. If inflation is rising, it also means your savings are shrinking. Here’s why inflation happens and what you can do to beat it.
What is inflation?
Inflation is when your money loses purchasing power over time. It can be tricky for people to spot inflation because even though their money looks the same, it is still worth less than it was a year ago.
The most common way to measure inflation is through something called the Consumer Price Index (CPI). This is when the purchasing power of a currency, like euros or dollars, is tracked against the average prices of a basket of goods. If the currency buys less than the year before, its purchasing power has decreased.
In the last two years inflation has been rising sharply. Inflation in Germany hit 3.1% in 2021, 4% in the United Kingdom and 6.2% in the United States, the highest rate for 30 years. In many cases, this is more than double the usual rate, which is bad news for both your salary and your savings.
Why is it back?
During the pandemic, many people fortunate enough to either work from home or receive furlough pay actually experienced a big rise in household net worth. This is because most people had fewer outgoings during lockdown but still received income. This created something of a global spending spree in late 2020 and 2021, creating higher demand for products. But factories weren’t being staffed, borders were closed and international supply chains ground to a halt. This pushed prices up as demand outstripped supply.
Others weren’t so lucky. Millions of people are still out of work. This created a global labour shortage and some experts think that inflation will only end once most of these unemployed are able to find employment. On top of all of this, governments printed trillions worth of currency to try and keep their economies afloat.
One thing’s for certain: When governments are slashing their growth forecasts, that means you should start thinking about doing what you can to insulate yourself from avoidable impact.
How you can minimise
Older generations are better insured against inflation because they were able to buy houses that have exploded in value with the change from a pint, as well as experience salary increases for decades. But that doesn’t mean the rest of us are powerless to do anything to protect ourselves. Here are some tactics both to prepare for inflation when times are good and to help your savings grow even when inflation is on the rise.
Invest in stocks - Savings accounts typically don’t earn enough interest to beat the inflation rate. Stocks and ETFs can earn around 7% per year which is enough to both beat inflation and help your savings grow.
Take action to save your salary - Use every opportunity to ask for a raise. Make sure your contract has opportunities to renegotiate your salary on a yearly basis. Remember to factor in the inflation rate or you could end up taking an invisible pay cut.
Pay off your debts - In times of inflation, debt can hurt. This is especially true if the rate of your debt is adjustable. This would mean the amount you owe increases, but the value of your funds are shrinking, making each payment more and more expensive.
Inflation is an unwelcome part of living in the modern world. But just because inflation is always there, it doesn’t mean you just have to accept it. Part of any regular financial check up should include a quick look at the rate of inflation. With these basic tips, you can make sure you are minimising your exposure and protect the value of your savings.