Inflation
Friday, 25 November 2011 05:50
Inflation is one of the most dreaded and misunderstood economic phenomena. We know that
the prices of commodities will, over time, rise and fall, responding to the pulls and pushes of
demand and supply. A failure of a particular crop or a flash fashion for a certain kind of clothing
can cause the price of that crop and the cost of that kind of clothing to rise, just as an
unexpected glut in the production of onions will cause the price of onions to fall. These price
movements are nature’s way of signalling to consumers that they should consume less of the
commodity facing shortage and more of the goods in glut and to producers to produce more of
what is in short supply and less of what is available in plenty. To even out these ebbs and flows
of prices would be folly, as we know from countless examples of misdirected government
interventions.
Inflation has little to do with these changes in relative prices of goods and services. It refers,
instead, to a sustained rise in prices across the board, that is, a phenomenon where the
average price of all goods is on an increasing trajectory for some stretch of time. Of course, this
may be accompanied by changes in relative prices. For the common person, there is something
threatening about the phenomenon of inflation, especially on those occasions when the rise in
prices of goods is not matched by an equivalent increase in the price of labour.
Rising inflation is one of the major problems of the world today .The Reserve Bank has been
battling inflation for the last 20 months. It had announced its 12th rate hike in18 months ,a
period in which it raised interest rates by 350 basis points .But efforts to control inflation have
been ineffective, in fact , inflation rates have consistently exceeded predictions. RBI is now
expected to increase rates again in its monetary policy review ion October 25.So,the problem is
how to manage /curb inflation which started from food and had a spiralling effect and is now
prevailing in almost all the sectors hampering domestic growth.
We are aware that whenever inflation comes, it comes with the positive as well as the negative
effects. So , what is important is we must give it time to subside and meanwhile, we must learn
to survive with it.
How to Survive Inflation?
Tips to avoid the negative effects of inflation are only suggestions and don’t constitute any legal
advice, therefore you’re free to use your own judgment depending on circumstances, to be
more prepared to face inflation effects you need to be aware of those effects, so if you haven’t
done so, please read some of them above, here are some tips:
• Be wise when holding cash, whether in your home or in your savings account, if you’re
earning 5% interest on the money you have in your bank, and inflation rate is 10% then you’re
in reality losing 5% and not earning anything.
• Be careful when buying bonds, high inflation rates completely destroy the value of long-term
bonds.
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Inflation
Friday, 25 November 2011 05:50
• If you have a variable-rate mortgage, fix it if you can find a good deal, have a low fixed
interest rate or 0% interest if you can find one.
• Invest in durable goods or commodities rather than in money.
• Invest in things that you're going to use anyway and will serve you for a long time.
• Invest for long-term capital gains, because short term investments tend to give deceptive
results or sense of making profits while in reality you’re not making profits.
• Learn about bartering which is trading goods or services without the exchange of money (it
was very popular in hyperinflation times).
• Manage wisely your recurring monthly bills such as (phone bills, cable TV...), it would help to
reduce them or eliminate some of them.
• Same goes with ephemeral items (movies, restaurants, hotel rooms...) they’re not bad if you
spend money on them in moderation.
• Ask yourself, do I really need these things I’m spending my money on? Think how much and
how often you will need something before buying it.
• Use the money saving tips such as: you need to reduce your consumption of things that are
rising rapidly in price (eg, gas) without having to reduce your consumption of goods that are
rising less rapidly or even falling in price (eg, clothes).
• Buy only what you need, especially objects that have multi-tasks, and are considered
durable goods.
The conclusion from all this is: You don’t have to live cheap, just live smart!
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