In 2015, I began working for my country’s equivalent of the Federal Reserve, which meant that we talked about inflation on a regular basis. The country’s most current reported inflation rate is also posted on the website of Bangko Sentral ng Pilipinas, being a primary indicator of where the economy stands. Now, in 2021, inflation is once again a hot topic especially for the biggest economy in the world – the United States.
News outlets, mainstream media, podcasts, everyone can’t seem to stop talking about inflation, as its impact is being felt by the end-consumer at supermarkets, restaurants, and every other business. From October 2020 to October 2021, the United States’ inflation rate stood at 6.2 percent, which is relatively high. Inflation for most healthy economies has been at the 1-to-3 percent range, and the Philippines’ central bank in fact targeted a 2-to-4 percent inflation rate for most of the past few years.
I’m no economist, nor am I pretending to be some analyst who knows his stuff – but I can easily tell you with confidence that a high rate of inflation is undesirable. It directly translates to a person’s lack of ability to buy things, as prices soar high. But the existence of inflation itself is essential for businesses to exist – how are banks supposed to lend money when prices become stagnant? However, when inflation gets too high for a country, horror stories of Venezuela and post-World War II Germany remind us how society can break down very quickly (sometimes irreversibly) due to money losing its value. Here are 7 reasons why you should be concerned of a high inflation rate.
1. Your salary or income will have a hard time catching up.
You will not feel the impact of inflation until you start spending your money. Salary increases for both public and private sector employees are instituted by employers to keep up with inflation (and not necessarily to reward for merit) but if the pay bumps are too marginal, inflation will get the better of these paid employees. Over the course of the pandemic, employers around the world have adjusted salaries in order to keep up with the competition – which is to the benefit of the worker – but these improvements may easily be overshadowed by rapidly increasing prices.
2. You will have a harder time borrowing money.
Central banks pay close attention to inflation because it’s one of their primary triggers in adjusting monetary policy. More specifically, they monitor inflation to decide whether they should increase interest rates for banks who borrow money, leading to a somewhat delayed yet inevitable effect of less borrowing, and less money in circulation. The end-result to the ordinary consumer would be a tougher time borrowing money from financial institutions. Because the central bank or federal reserve has raised interest rates, banks will borrow less, and they in turn will either increase their own borrowing rates and/or offer the privilege to less people than it used to.
3. You could lose your home, especially if your mortgage isn’t fixed rate.
If you fell prey to adjustable-rate mortgages because of the low monthly installments during the first few years, then you could certainly be in trouble once the inflation rate becomes so high that the entire economy experiences a ripple effect. It’s naïve to think that an increase in gas prices will not lead to higher cost of goods – as logistics costs become directly affected by higher gas prices. In the same vein, if high inflation exists in the economy, the institutions who lent you money to pay for your house will accordingly increase their cost of lending. While fixed-rate mortgages are only available to people who can afford the pricey monthly payments, the advantage is that the interest rate had been legally agreed upon by you and the lending entity to stay the same over time – which means your ability to pay your mortgage will effectively become inflation-proof. On the other hand, in an adjustable-rate mortgage, you will be at the mercy of how the economy fares – recall the Great Recession from a little over a decade ago, when several people lost their homes.
4. You might find it difficult finding a job.
An increase in the price of goods means that businesses – in an effort to keep their operations running –will look for ways to save money. And sometimes that means hiring less people. What used to be a two-man job will fall into the hands of one person, even if it means working overtime (because it would cost more to employ one more worker). Businesses who decide to deploy lean manpower often do so because of the economic situation. They’re well-aware that it will very likely lead to overwork and burnout, but if it means saving money to make ends meet, they’ll resort to it. And for the people working those jobs, they wouldn’t mind working the extra hours if it means keeping their jobs.
5. You could find it difficult to hire people if you’re an employer.
And on the other side of the wall, employers too, will have a hard time staffing up. Hiring people costs money – advertising for jobs, paying recruiters, man-hours spent on screening, interviewing, and onboarding people. A business environment experiencing high inflation will not make it friendly for businesses who need to fill positions. Not to mention applicants who demand more money – and why? Because the prices of goods and services are increasing at a fast rate. These applicants need jobs whose take home pay allows them to afford these goods and services.
6. Your ordinary savings will take a hit.
Perhaps one of the worst, and yet one of the most overlooked consequences of high inflation is the impact it has on ordinary savings. Ordinary savings are those savings which you deposit in a bank with the least risk involved – they’re often fully guaranteed in case the bank goes into insolvency, and they yield almost zero in interest earnings (thanks for nothing, withholding tax). Because these savings yield near-zero interest rates, this means that as time goes on, they lose their value while they sit in your bank account because of inflation. Again, a low inflation rate (2-4 percent) won’t hurt your savings that much, but if you get to a 10-percent inflation, 100,000 dollars in savings would lose 10,000 dollars in value.
7. Your country’s currency will weaken.
More often it is a weak currency that causes inflation, rather than the other way around, but as time goes on these two things become kind of the chicken-and-the-egg wherein you won’t really know anymore which came before the other. A similar situation exists in Turkey where the government decided to do away with interest rates (a concept frowned upon under Islamic law) in order to weaken their currency. The intention was certainly not to cause high inflation – which was bound to happen – but it was to reduce the price of goods in Turkey whenever foreign currency was used to purchase these goods, incentivizing exporters. However, the government’s experiment looks to be backfiring and they too, have caused a high inflation rate to negatively impact citizens. And for the average citizen, weaker currency means that the money you earn will not be worth very much once you spend it outside the country, or whenever you pay for goods and services located elsewhere. Wouldn’t it be a tourist’s worst nightmare to travel to a foreign country and overnight, find out that the exchange rate suddenly turned really bad?
What can you do to keep up with high inflation?
Some people have taken more drastic measures to keep up – leave their jobs for higher pay, buy gold, spend their savings on cryptocurrency, etc. And others simply invest in a diverse pool of stocks, some invest in real property. Personally, I haven’t done any of these things, but what I’ve been inclined to do has been to buy regular grocery items in bulk. And no – I’m not in panic-buying mode, nor would I ever suggest you resort to the 2020 trend of filling your room with toilet paper. Instead, just be practical and think of the items that would likely become more expensive in a few months. If you used to buy mini sachets of laundry detergent, maybe buy the ones that come in 2-pound bags? And if you use a lot of cooking oil, maybe double your usual grocery-run purchase? I wouldn’t pass for a financial guru, but I would ask you to remind yourself of the seven concerns I raised in this article. Thanks for reading.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.