Could Inflation Be a Friend and Not a Foe?

28
Aug

Could Inflation Be a Friend and Not a Foe?

When inflation increases, people often feel the sting of paying more for groceries, gas, and almost everything else. Many may feel inflation is terrible because their paychecks are shrinking, and they don’t like paying more for the same items. But inflation also has positive benefits that may occur over time, such as:

Wages increase

Employers often increase wages for their current employees and new hires to attract and retain workers during inflation. For a period, inflation may increase job openings at employers with lower wages until they increase their wages too. Higher wages bring more money into the economy as workers have more money to spend.

Property values increase

Pre-existing homes, automobiles, and some investment strategies increase in value during periods of inflation.

Fixed-rate debtors’ benefit

The payments and interest rates of fixed-rate mortgages and other debts remain the same as the property’s value increases as inflation rises.

The risk of deflation minimizes

Deflation is when prices fall. During periods of deflation, people stop buying because they believe the prices will fall even more. Deflation often leads to fewer sales, layoffs, and wage decreases which is the opposite of what occurs during inflation.

People buy now versus later

When inflation starts, people buy because they believe prices will continue to rise, and they don’t want to pay more for an item in the future. This action helps businesses increase their profits and often leads to hiring, which helps stimulate the economy.

The Federal Reserve uses inflation targeting to keep inflation under control by raising interest rates. When people hear that the Fed intends to raise interest rates, they often react by buying before it goes up.

Personal savings increases

When prices are higher, people tend to cut back spending on non-essential items and save money instead.

People switch jobs

When inflation rises, people have less purchasing power and need to increase their incomes to maintain the lifestyle they’re used to. For many, switching jobs is a favorable decision they may only have done with the need to ‘keep up with inflation.’

Inflation is temporary and can impact people differently over time. It also signifies a healthy economy, even though inflation may feel uncomfortable. To help offset the impact of inflation, reduce your debt with variable interest rates, increase savings, and look for ways to save money on purchases.

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