Inflation is a recent buzzword used by many people who may not necessarily know what it means to show how smart they are. You become wiser by not only knowing what it is but how it affects you in your daily life and how to make the right choices.
Inflation is the general increase in the prices of goods or services. For example, one day, you go to a supermarket and buy the same goods as the last time you went, but the total on the bill would be higher.
Your first instinct would be to check whether there’s a product that you may have bought by mistake. However, you realize that you didn’t buy anything besides your usual shopping list.
Upon closer inspection, you discover that the goods you usually buy have increased their price. You’ll notice the increase in price not just for one item but all items in general. That’s inflation.
Inflation means that you need more money to buy the same goods. If you’re on a tight budget, you can buy fewer goods with the same amount of money, as they’re unaffordable.
In simple terms, your money would have lost its purchasing power.
The European Central Bank targets around 2% inflation per year to maintain economic stability. For example, if you spent Euro 100 last year, you’ll need Euro 102 to be able to purchase the same goods.
Governments try to compensate for these increases through instruments such as cost of living adjustments as announced in budget speeches. The private sector bears all the cost of the increases for its employees.
While 2% can be considered normal, lately, the inflation around the European Union was high as 8%. For example, you’ll need Euro 108 instead of Euro 100 or Euro 8 more to buy the same goods as one year ago.
The average consumer can’t control inflation as geopolitics is a complex subject that only superpower countries can attempt to influence. Nonetheless, you can at least try to reduce or limit the impacts of inflation on your hard-earned money.
Like anything in life, good and bad times pass. We don’t want good times to pass, yet no one knows how long bad times last. Ideally, you’ll be well prepared to pass through unfavourable situations like inflation with minimal impact.
As a consumer, your goal should be to preserve your money. The less you spend, the better. However, bills need to get paid, and food needs to get on the table.
The trick is to be frugal or economical. To be economical means to be moderate in your spending.
Do you need to splash money out on designer clothes, or will beautiful unbranded clothes serve the same need? Do you need to buy the last phone that came out last month, or will it cost more than your average salary?
You have to distinguish between a need and a want. Needs are essential items, so you’ll still need to buy them regardless of your financial state. These include consumer essentials like food, healthcare and utilities.
On the other hand, wants are non-essential items or things that you can survive without them. Wants are consumer discretionary as buying a car, appliances, entertainment and investing.