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4 ways that inflation affects you and your family

Economics has never been the coolest topic of conversation and probably not the most easy-going 'icebreaker' on a first date. Although unglamorous at times, it does dictate exactly how much money is in your pocket and what you will spend your hard-earned money on.

 

So, now we have your attention, let's look at 3 ways that inflation affects you and your family. 

 

Firstly, what is Inflation? According to Wikipedia:  'In economics, inflation is a sustained increase in the price level of goods and services in an economy over a period.' The key measure of inflation is the inflation rate. In the UK, the Consumer Price Index (CPI) measures inflation and is set by the British Government. The rate of inflation is measured monthly and monitors the percentage change in consumer prices. As of October 2018, the CPI is currently 2.4% (Office of National Statistics). 

 

1. A decrease in purchasing power 

The first thing that happens when Inflation increases is quite obvious. Your money, right now, is worth less and your purchasing power has been reduced. Inflation is a decrease in the purchasing power of currency due to a rise in prices across the economy. Inflation is measured by looking at increases and decreases in a ‘basket’ of goods and services, which makes up the consumer price index (CPI).  

 

2. Short term increases in spending and investing 

As cash will only lose value as inflation rises, people tend to buy things they might need in the future now. Historically, this is a predictable response to declining purchasing power.  It can be argued that it is better to get your shopping out of the way and stock up on things that probably won't lose value over time. A hedge against inflation can also be to invest in stocks and equities. 

 

3. More Inflation 

It might not seem as obvious, but inflation can lead to more inflation and become a continuous cycle. The sudden urge for purchasers is to spend and invest in the face of inflation, which then tends to boost it again. The same cycle (only the other way) happens when a recession hits the economy. One of the effects of a recession is reduced spending. This is the exact time when people should spend, but due to the fearful nature of a recession, stop spending and the cycle continues and worsens. 

 

4. Eventually, Higher Interest Rates 

The UK Government can attempt to control national spending habits through monetary policy. By raising interest rates, the UK central banks can put a dampener on increased spending spirits. Suddenly, any monthly payments on a new car, or mortgage, can seem a little too high. As interest rates have been historically low for some time now, (currently, 0.75% - Bank of England, November 2018) there hasn't been much incentive to save. In 1980 the UK interest rate was 14%. That gives you every incentive you would need to save! It's fair to say we probably won't see an interest rate like that for the foreseeable future and with Brexit just around the corner, it takes an extremely educated guess to know where the economy is heading next. 

 

 

Publish date: 14th December 2018

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