What Higher Inflation Could Mean for Us

We may have had an increase in the number of people questioning the major shift in the economy of most countries as a result of the COVID19 pandemic. 

While some countries are still experiencing a major decline in their economy, others have commenced reaching an economic state similar to what it was prior to the pandemic. Regardless of where the country is in this cycle, for those who have printed much money to distribute / subsidize their citizenry, higher inflation will soon be upon them.

A country is said to experience inflation when a person has to pay more for the same goods and services. This makes the cost of living more untenable especially for the majority of people as the prices of goods and services rise. 

Cost inflation of goods and services can be an advantage to those who owned the assets before prices began to rise. However, on the other side of the coin, for individuals whose income does not keep pace with inflation, their buying power decreases.

In January 2021, inflationary pressures can be felt mainly from food prices (3.8%), used cars and trucks (10%), utility gas service (4.3%), medical care services (2.9%), shelter (1.6%), electricity (?%) and new vehicles (1.4%). Meanwhile, apparel prices fell 2.5% and energy costs went down to 3.6% mainly due to gasoline price decline (-8/6%). 

Further effects of higher inflation 

#1 Potentially faster growth in the economy

Households would have to buy more than what they need today to avoid the increase in tomorrow's prices. In parallel, supply of goods and wage levels would be unlikely to keep up with the price inflation.

#2 Decrease in the value of pensions, savings, and treasury notes

It also means that there would be a decrease in the value of pensions, savings, and treasury notes. When inflation rises faster than the return on treasury notes, people rush to sell them further depreciating their value. The U.S. government is then forced to offer treasury yields to sell them when this happens and as a result, most mortgage interest rates increase.

#3 Negative impact on retirement plans

Inflation can be negative on retirement planning because your savings will buy less as time goes by. This is because your target amount must keep rising if it should pay for the same quality of life.

To be on the safe side, ideally you should be saving more for your retirement more than what you think you need. It is important to start saving soon to benefit as much as you can from compounding interest.

Potential positive impact of inflation

Mild inflation is not harmful to the economy. There is a healthy side effect because people tend to spend now more than when prices become higher in the future. 

The fed would like some level of inflation because consumer spending drives economic growth. This in part because inflation can lead consumers to believe that prices will continue to rise.

If inflation ever reaches a catastrophic stage, the best defense should be to buy gold or any currency that isn't attached to the U.S. dollar as the local currency in a hyperinflationary economy would no longer be a reliable store of value.

Investment in the stock market isn't a bad idea as it poses a means to benefit from inflation. So holding stocks was traditionally a good way to benefit and protect yourself from being negatively impacted by inflation. 

Conclusion

Inflation has different levels and the consequences are in a spectrum and not just black and white. Your understanding of how inflation works, your investment and savings options all contribute to your armor against any harmful inflation which might come.

At Qinta, we are working towards empowering people often challenged by out of reach, costly and complex financial products so that people can protect their hard-earned money even if a high level of inflation hits the U.S. Sign up to get early access and early user rewards once MVP is available at https://www.qinta.io.