When the US inflation rate reached 8.6%, it sends a shiver to the global economy. Its effects are slowly creeping in. As for Filipinos living on the other side of the world, the question is: How does inflation affect the Filipinos?
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What Is Inflation?
A quick search will give you this definition: "Inflation is a sustained upward movement in the overall price level of goods and services in an economy. It takes more currency units to buy the same amount of goods and services as a result. Your money buys you less, be it bread, toothpaste, rent, or medical services." What Is Inflation?
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| Comparison: US and PH 5 Year Inflation Rate | |
| US 5 Year Inflation Rate | PH 5 Year Inflation Rate |
What Causes Inflation?
The cause of inflation can be categorized into two groups:
- Demand-Pull Inflation
- Cost-Pull Inflation
Demand-Pull Inflation
If Aggregate Demand rises faster than Productive Capacity. In layman's terms, if Demand is higher than the Supply.
If demand is high, this means that people have more spending power. In turn, product prices tend to increase to cover the lack of supply.
Cost-Pull Inflation
This happens when the cost of raw materials to create a product and its production process is high.
This is determined by the supply-side factors such as higher oil prices and wages.
The simplest analogy that we can compare is when the government mandated the pension increase. The SSS, to cope with the increase, rack up the member's contribution.
Pension here is the product, while the Contribution is the raw material.
If you want to dive deep about the causes of inflation, read this article Causes of Inflation.
How Are You Affected by Inflation?
If you live in a country that powers the majority of the economy through product exports. Your country can at least weather the inflation without breaking much of the citizen's back.
This is because a country that has products to share with the rest of the world can be considered self-sufficient.
However, if you live in an import-dependent country. Your country will feel the full impact of inflation.
Why? Here's a simple example.
Country A is exporting rice to country B. When inflation hits, the rice industry took a hit. It needs to increase its export price to cope with its production costs.
Country B, which is dependent on this export to keep its citizens fed, has no choice but to accept the price increase.
In turn, the now imported rice will also increase its price to cope with the costs of buying it. This price increase will be shouldered by the citizens who are actually buying the product.
Still not clear?
Let us have another example.
It is obvious that one of the strongest currency is the US dollar. This is why when it comes to debt, this is used as the base currency.
If the inflation is low, the exchange rate is also low (this may not always be the case, but we are just viewing the situation from a high level).
If the exchange rate is low, then the debt payment is low. Let us say from Php48 to a dollar compared to Php53 to a dollar.
A Php5 increase will matter a lot if you are paying a debt in trillions.
You might ask…How am I affected with the country's debt?
I think one word is enough to describe this one. And that is… TAXES.
How Can You Weather Inflation?
Learn the Art of Budgeting
This is the time to polish your budgeting skills.
Start operating in Safe-Mode by eliminating the unnecessary expenses and only focusing on what's important.
Find Another Source of Income
We all have 24 hours a day. So it is not impossible to squeeze some time to do a part-time job or a side hustle.
This is the quickest way to earn some extra cash to weather the inflation.
Investments
This is not the fastest way to earn an income, but it can definitely help you in the future.
Below are investments that are considered by experts inflation-proof:
- Gold and Silver - Go old school by acquiring these precious metals, as they have traditionally been viewed as good hedges against inflation.
- Real Estate - Land and property, like commodities, tend to rise in value during periods of inflation. Obviously, not all of us can just buy a property that we like. In order for us to have a piece of the real estate pie, we need to invest in Real Estate Investment Trusts or REITs.
- Stocks - Stocks still tend to beat inflation even though their growth might be slowed. Technology and consumer goods are the best areas to invest.
- Alternative investments - Include tangibles like fine art, vintage toys and trading cards, vintage cars, and other collectibles. These all tend to make good hedges against inflation.
Article appeared on Yahoo!Finance
Article originally appeared on GOBankingRates.com: Where To Invest Your Money When Inflation Is High — and What Investments To Avoid
Closing Thoughts
Inflation is here. You can't stop it, but you can definitely weather it.
Your financial decisions from here on out will decide if you will fold or not.
Just remember these three items:
- Budgeting
- Another source of income
- Investments
What you should do today
Do you have any tips on how to weather the impact of inflation? Share your perspective in the comments below.
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