How to tackle inflation like a pro
Learn how you can make your financial life immune to costly lemons
Do you notice that every article and every social media influencer is talking about inflation? It has become the new buzzword.
High prices pinch, we know. But let’s look at it as a phenomenon rather than a problem.
So what exactly is inflation? And why does it occur?
Inflation is a general increase in the prices of goods and services in an economy, indicating a decrease in the purchasing power of money.
Current inflation concerns are because of 2 things:
A sudden increase in demand after Covid restrictions were lifted
Russia - Ukraine crisis that disturbed the global supply chain
When the economic activity of a country is at a low, the money supply is increased to stimulate economic activity in an effort to get it back to normal levels. As only the quantity of money increases, the value of it goes down and the same good become costlier than before.
Also, when supply shrinks compared to demand (like that of oil), a form of inflation called ‘stagflation’ occurs.
The inflation rate of India in 2022 is estimated to be a whopping 6.62%!
How to tackle inflation - Short term measures to adopt
Raise your prices: You cannot expect to keep earning the same amount of money and spend more. The number one way to protect yourself from inflation is to not expose yourself to it. Inflation means declining purchasing power. To avoid losing that power, you need to keep yourself abreast with ongoing prices. Raising your fees by the inflation rate as a professional is a must. If you are a salaried worker, do not hesitate to ask for a raise from your employer.
Postpone expenses: There is nothing wrong with spending on what you like, but instead of just being a consumer, choose to be a smart one. Postpone unnecessary purchases for the future. The very reason interest rates are raised by the bank is to curb inflation. Prices will come down in the future. You just need to be patient and live a little frugally until then.
Rejig your investment portfolio: Inflation has a ripple-like effect. Almost everything in this world is affected a little by the prevalent inflation rate. When banks increase their interest rates aiming to curb inflation, people move their money from the stock markets to debt instruments because now they are getting a higher risk-free return. Businesses, on the other hand, are negatively affected due to higher input costs and lower profits. The stock markets turn bearish during this time. It is advisable to shift some of your funds to commodities, energy (which constitute input costs), and debt instruments till the bulls regain their strength.
Practices to adopt for the long term
Start investing smartly: If you haven’t started investing yet, start now! It is the most effective and efficient way to beat inflation. Everyone tells you to invest, but no one tells you how. You need to invest in assets that beat inflation. If you are locking your money for a 5% interest rate per annum while the official inflation rate exceeds 6%, you know you are losing. You need to ensure that your returns are covering inflation at least.
Measure returns the right way: The main reason you are not beating inflation even after you have started investing is that you are not measuring returns the right way.
Real return is the percentage return on your investment you make after covering the inflation rate. If you make a 10% return during a 6% inflation period, your actual returns are just 4%.
It is a wise practice to measure your investment returns after taking into consideration the inflation rate at the end of every financial year.
Also, do remember to subtract maintenance fees, agent charges, tax, etc. while arriving at your actual returns. They are costs that need to be subtracted in determining your profits.
This simple practice will help you pick the right investment instruments while discarding the unproductive ones.
Inflation is the invisible villain of your financial life. Just being aware of it and adopting the right practices to combat it are enough to retain and improve your purchasing power.