Flipping through the pages of an expenses diary, I was surprised to see, among other things, that the cost of a bar of chocolate was Rs 10 last year. I remember Ravi saving his pocket money every week to buy his favorite treat. Visiting the store after a few months, excited to get his chocolate, Ravi was shocked that its price had increased to Rs 13. This time his Rs 10 was no longer enough to buy what he once could similar to how investors watching bajaj housing finance share price fluctuate understand that the same investment today may not bring them the same returns as before.
What happened above is referred to as inflation which means that over time, prices rise, and with the same money, one can buy fewer things. Inflation affects increases in prices or the cost of living in a country. Rising costs and reduced purchasing power uncertainty affect both individuals and businesses. On the other hand, Inflation also encourages spending, increasing demand for goods and services resulting in higher sales and profits for businesses. Investors often turn to the best stock advisory services to identify inflation-resistant investments and protect their financial health. We shall explore how inflation affects your financial well-being and what can be done to face it.
Types of Inflation
Inflation can be classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation. This structured format below will make it easier to understand the key differences between the types of inflation.
| Type of Inflation | Cause | Effect | Example |
| Demand-Pull Effect | An increase in money supply and credit leads to a higher demand for goods and services than the economy can produce. | Higher demand creates a demand-supply gap, increasing prices. | More disposable income results in increased spending, and rising prices of consumer goods. |
| Cost-Push Effect | Rising production costs result from supply chain disruptions or increased commodity prices. | Higher costs for raw materials and production lead to increased prices for finished goods. | Rising oil prices increase energy costs, and this gives rise to higher transportation and product costs. |
| Built-In Inflation | People expect inflation to continue, leading to higher wage demands. | Increased wages raise production costs, creating a wage-price loop. | Workers demand higher wages to keep up with rising prices, which in turn increases product prices. |
How Inflation Affects your Financial Health?
The financial well-being is affected by inflation in several ways. It becomes difficult to buy everyday goods and services as inflation makes them unaffordable by reducing purchasing power. The value of savings reduces due to inflation and the growth of accounts is slowed down by rising interest rates pressurising borrowers. Furthermore, inflation affects investment volatility losing value for fixed-income assets while equities and commodities perform unpredictably. Wage stagnation happens when salary hikes fail to keep pace with rising costs, further straining household budgets.
Steps to Protect Yourself from Inflation
Invest Smartly to beat Inflation
Investing in stocks and mutual funds outpaces inflation over the long term. Despite rising prices, investing in equity funds or different stock portfolios can help grow wealth.
Investing in gold, real estate, and inflation-protected bonds can increase value during inflation. Bonds provide security at this time and can adjust returns accordingly.
Grow your Earnings for stability
Acquiring new skills continuously gives a competitive edge in the job market. Upskilling in popular demand areas can assure job security and improve career opportunities.
Additional income streams are beneficial for financial stability during inflation.
Strategic Debt Control
To reduce the stress of inflation, it is recommended to pay off high-interest loans like credit cards faster to avoid debt due to compounding interest.
To ensure stable monthly payments, fixed-rate loans with low EMIs can be selected to protect you from market fluctuations. This would reduce loan repayment costs.
Smart Budgeting & Savings
Minimizing expenses and identifying unnecessary spending areas saves money.
- Storing savings in high-yield accounts or inflation-linked bonds will maintain the purchasing power of money.
- Bulk purchases for frequent-use items minimise costs and check last-minute buying expenses. Availing of discounts and other loyalty programmes saves money.
Conclusion
Strategically combatting inflation taking proactive steps is crucial. Making informed investment choices, lowering expenses and optimising savings can safeguard against increasing costs during inflation. Planning a solid financial plan shall protect your wealth and give you stability in these times of uncertainty.
