What is inflation?
Essentially inflation is the decline in value of a Currency ie € and the increase in price of good and services. A basic example of this is today you can buy 1 apple for €1 tomorrow it will cost you €2 to buy 1 apple. You now need to spend more euros to get the same product or service.
RISE IN THE COST OF LIVING
So why has the price of apples above increased?
Price increases generally come from the manufacturer passing the increased cost of raw materials, wages, fuel etc over the customer.
2. A second point worth noting, a surge in demand for goods and services will increase the price of the goods. A good example of this right now is the price of houses in Ireland. Increasing demand and a shortage in supply results in higher prices as consumers are willing to pay more.
How does it impact you negatively?
As mentioned above inflation reduces the value of your money. So if you have €100 at home under the mattress or in a deposit account, today you can buy 100 apples. The following day as inflation increases the €100 you own now has devalued by half. You can only buy 50 apples with the same money.
Holding money at home or in a low interest deposit account is bad for the consumer and your money.
Are there any benefits to inflation?
In one word absolutely. To some they see the sign of inflation as a struggling economy, while others see it as a time of potential prospering economy.
As inflation erodes the value of cash, this is seen as an opportunity by some consumers to spend or invest money where it can hold or grow in value.
When goods and services are in demand it has the potential to lower the rate of unemployment in an economy. As more people are working and have increasing disposable incomes they are more likely to spend.
Lastly, inflation reduces the cost of borrowing. Referring back to the example above where if you borrowed €100 to buy 100 apples. With inflation as pay back the lender the next day the value of the €100 is worth less (50 apples) compared to when it was originally borrowed.
How can you combat inflation?
Individually we cannot stop or avoid inflation. Although the ECB does try to control and target an inflation rate of around 2%. Through monetary policy the ECB can increase or decrease inflation by increasing or decreasing the supply of money in economy.
How individuals can reduce the impact of inflation on their cash.
1. Invest in yourself & upskill.
As inflation can have a negative impact on peoples cost of living, upskilling is a great tool to potentially increase your income. Increasing your skills and knowledge may allow you to generate additional income from your full time employment and provide a greater disable income for you and or your family.
2. Investing in the stock market
Statistics show that the stock market has consistently provided positive returns in the long run. While short term dips are unwelcome the market has always bounced back over time and shown growth. You should check out our recommended Zurich funds in the Alpha Savings & Investment Club
3. Diversify your portfolio
Diversifying your portfolio in an actively managed fund protecting against inflation but also any down turns in the market. Commodities and commodity resource companies tend to do well during these times as well as some cases for healthcare companies and property. Equities Generally do not perform well during times of inflation as interest rates rise.