Inflation has been a hot topic of conversation lately, and for good reason. Inflation is the highest it’s been in nearly four decades, and it’s affecting every part of our day to day lives.
Today’s inflation is exacerbating many people’s money issues, causing more and more strain on many household budgets and leaving many on the hunt for ways to save money. But what exactly is inflation, and why is it rearing its ugly head now?
Inflation is the increase in the price of goods over a period of time. It is natural and can be a good thing – to a certain extent. Economists believe that a little inflation signifies a healthy economy with healthy supply and demand. If consumers believe prices will rise slightly, they are more apt to spend their money at present. There is no cut and dry rule for what constitutes healthy inflation, but economists and policymakers generally accept that 2% inflation is acceptable.
When inflation gets out of hand and starts exceeding the 2% mark, that’s when the economy takes more of a hit. Our current inflation rate is around 8%, quadruple what it should be. So what caused this drastic change?
Inflation has many causes, some of which are more complex than others. In general, these causes can be broken down into two categories: demand pull inflation and cost push inflation.
Demand pull inflation is when the demand for items is greater than the supply of those items. When demand gets ahead of supply, prices increase as upward pressure is applied. Here are a few causes of demand pull inflation:
Cost push inflation occurs when the cost of materials and wages increases. These costs are then passed on to the consumer, resulting in inflation. Here are a few causes of cost push inflation:
Our current drastic inflation is a result of both demand pull inflation and cost push inflation.
While it a little inflation, as mentioned above, can be ok, there are definitely some downsides. Let's look at the possible consequences of inflation.
When inflation occurs, it causes a decline in purchasing power. This leads to a cycle where:
Consumers spend less money → Businesses cut back on investing and hiring → Higher unemployment rates and reduced spending
The bottom line is that when inflation occurs, it can be hard to get out from under.
But what does this mean for you? Inflation has three major effects on consumers in their everyday lives:
In short, every dollar matters more than ever in times of inflation.
Budgets are tighter and uncertainty runs rampant in times of inflation. But there are some steps you can take to protect yourself from the effects of inflation and make it through these financially difficult times.
While it’s not the most exciting task in the world, making a budget is more important now than ever. A little planning can go a long way in keeping your spending (and saving) on track. Simply follow our easy guide to budgeting to create a realistic blueprint for your finances.
For a more in depth guide on budgeting, you can check out our blog post here. Be sure to include a rainy day fund in your budget; experts recommend having six months worth of expenses tucked away. Rainy day funds are important, even when budgets are tight (in fact, they are even more important when money is tight because you are less likely to be able to handle a financial emergency).
Now is a great time to focus on paying off any variable debt that you have, such as credit card debts and personal loans. Since these rates can change based on other benchmarks, it’s a good idea to pay them off so that you are not subjected to increased rates. Include this as an item in your budget to ensure you prioritize it.
Higher inflation rates tend to lead to higher interest rates. Car loans are not directly affected by the fed funds rate, and the competitive nature of the car loan industry makes the interest rates more stable than rates in other industries. But chances are the rates will increase over the next few years, as we are still experiencing incredibly low rates for refinancing.
Refinancing your car to a lower APR can save you a lot of money in the long run and help you stretch the money in your budget. How do you know if it’s worth it to refinance your car loan? Easy! If any of the following apply to you, it’s worth considering vehicle refinance.
Vehicle refinance can free up hundreds of dollars in your monthly budget. And in the era of hyper inflation, that can make a huge difference in your day to day life. If vehicle refinance sounds like a good idea to you, contact Auto Approve to get a free quote today!
Bonds are a great investment to make in an inflated market because they are guaranteed to keep pace with inflation. Since they are fixed rate investments, they are adjusted for inflation, making them a safe investment in uncertain times. Consider an I-bond, which can be cashed out after a year, or a Treasury Inflation-Protected Securities bond (TIPS), which can be cashed out after two years.
We hope these tips will help you navigate the waters of our inflated economy. Understanding how inflation works is important because it can help you protect your money and your investments. Inflation changes how we think about our money, making it a time to hold off on riskier investments and instead prioritize budgeting, saving, and cautious investing.
Refinancing your car loan is a great way to save some of your hard earned cash. If rates have dropped since you initially took out your car loan (and they probably have), now is a great time to consider refinancing. Get in touch with one of our refinance experts at Auto Approve today to start saving today!