How to Survive Inflation

What is Inflation?

Inflation is a general increase in the prices of goods and services over a period that results in the decline of the purchasing power of money and an increase in the cost of living in a country. When inflation occurs, every currency unit now buys fewer goods and services than before. Inflation can be measured through the consumer price index (CPI) and personal consumption expenditure (PCE) approach. Many countries have faced high inflation in the last year due to disturbances in the global political landscape. This article aims to find ways to survive inflation.
Here is the inflation tracker by the Financial Times

What is CPI?  

Consumer Price Index (CPI) measures price changes in a particular basket of goods and services over a period. Inflation is measured through CPI. The percent change in CPI over some time gives inflation over time.

What is PCE?

Personal Consumption Expenditure (PCE) measures how much a consumer spends on goods and services, excluding personal spending like investments, foreign spending, etc. It measures inflation by measuring changes in the consumers’ cost of living

Causes of Inflation

There are many theories presented by economists that explain the causes of inflation. Out of these four significant theories are as under

1) Excessive Printing of Paper Money

An increasing supply of money drives one major cause of inflation. The proponents of this theory believe that an increase in money supply causes an increase of money in circulation, and thus, a proportional increase in prices results in inflation.

This is also called the Quantity Theory of Money. It was initially presented by the mathematician Nicolaus Copernicus in 1517 and later modified by Milton Friedman in the 1950’s and 1960’s.

2) When Demand is Higher than Supply

This is termed as Demand Pull Inflation. Keynes formulated this theory, suggesting that an increase in prices of goods and services occurs when there is high demand for a good and that good is short in supply. This type of inflation occurs when an economy’s overall demand for goods and services exceeds its ability to produce them. This uncertainty leads to high inflation. When demand exceeds supply, companies will respond to the increase in demand by increasing prices.

3) When Production Costs Increase

This is termed the Cost-Push Inflation theory. This inflation occurs due to increased production costs like wages and raw materials for producing goods. The increase in the product’s price leads to a decrease in the supply of these products. While demand does not change, the product’s price increases, causing the total price to increase.

4) Mismanagement in the Production and Supply Chain

This is termed the Structural Theory of Inflation. It describes the type of inflation that usually prevails in third-world countries. This explains that inflation occurs due to structural weakness in producing and maintaining the supply of goods. Inflation occurs because of poor infrastructure, under-productivity, and lack of technology, fostering an imbalance between demand and supply.

How to Survive Inflation?

Inflation is one of the significant economic problems the world has been facing for a long time now. Below are some strategies through which one can outpace inflation;

1. Make a Budget

The most important way to combat inflation is budgeting. Budgeting means making a plan for your income. A budget helps you to plan and allocate spending efficiently, thus reducing the effects of inflation. During inflation, a general increase in prices occurs, causing a reduction in purchasing power. A proper budget helps prioritize essential expenses, identify the sites where to cut spending and allocate more funds. Furthermore, having an emergency fund in your budget can buffer against unexpected shocks.

2. Diversify Your Investment

Diversification of investments, like investing in different assets such as stocks, bonds, and precious metals (gold, silver, etc.), can act as a hedge against inflation because different assets react differently to price increases. Some assets like stocks and real estate have a history of serving as a hedge against inflation. Furthermore, this diversification of investment creates a more resilient portfolio that has the potential to outpace inflation. Moreover, diversification does not guarantee eliminating the overall impact of inflation, but it can help reduce potential risks associated with inflation. Investing in Treasury Inflation Protected Securities (TIPS) can also protect against inflation.

3. Increase Your Earnings

To fight against inflation, one must find ways to increase their income. This era of the internet offers a variety of opportunities through which one generates enough revenue to outpace the effects of inflation. Through the Internet, one can earn more to satisfy his needs and wants by using their skills. One can do online business like drop shipping, work as a freelancer, forex trading, and much more. That, in turn, helps them earn more resultantly and protects against inflation.

4. Maintain an Emergency Fund

An emergency fund is a committed investment fund to cover startling money-related crises or unexpected pressures. It acts as a money-related security net, allowing you to handle unforeseen circumstances without depending on credit cards or advances or disturbing your long-term investment funds or speculations. Experts recommend holding funds for three to six months as emergency funds to deal with unforeseen financial crises.

5. Make Adjustments in Your Lifestyle

Adoption of certain habits can help survive inflation. Listed below are some ways in this regard;
Grow your food by setting up a small food garden in your home. Hydroponics is one of the best vegetable growth solutions in densely populated urban societies. This technique does not require soil, and vegetables are grown on vertical towers, so naturally, they require very little space.
One way to save money is to cut expenses by avoiding private transportation, such as cars or motorbikes, that consume gas and increase your bills. Instead, opt for public transport, which is usually more affordable and eco-friendly.
It is very easy to get carried away by the excitement of a new product or a sale and spend money on things we don’t need. Therefore, avoiding visiting places that may tempt you to make unplanned purchases is recommended.
Try to avoid eating outside and quit bad habits like smoking, drinking, etc. One can triple the benefits of quitting these habits. First is saving the money that was being used to buy them. The second benefit is health improvement (Health is Wealth). The third is saving the funds used when one gets ill

6. Reconsidering Large Expenses

It is also essential to reconsider large expenses during inflation and economic uncertainties. Significant expenses like buying a home, a car, or another considerable investment can significantly impact your finances. Re-evaluating these expenses can help you make appropriate financial decisions for the current economy. Rethinking a hefty price allows one to negotiate better terms, explore discounts, or wait for better deals. This can save a lot of money in the long run. Reassessing significant debts doesn’t necessarily mean avoiding them altogether; instead, it means evaluating their timing, necessity, and impact on your overall economic health. It allows you to be innovative and know how to manage money, especially during economic change or inflation.

Conclusion:

Inflation is a significant global issue, and people struggle to finance their basic needs. So, specific strategies like budgeting, diversifying investment, little adjustments to lifestyles, etc., can be beneficial to mitigate the effects of inflation. By adopting these strategies, one can survive inflation without being financially damaged.