Inflation

What is inflation?
Simply put, inflation is a gradual increase in prices over a period of time. When considering inflation in financial calculations, you are altering the results of your calculations based on the expectation that prices will rise in the future. Inflation is a process of continuous increase in the prices of most goods and services in a country. This does not necessarily mean that all prices increase. There may be some exceptions, such as computer prices which have actually declined in recent years. Inflation can therefore be described as a persistent general increase in prices.

How inflation is measured?
There are two distinct measures of inflation that are typically used in financial calculations; the Producer Price Index (PPI) and the Consumer Price Index (CPI). The CPI, as the most widely used measure of price change, is often used in escalation agreements to adjust payments for changes in prices.

Why is inflation bad?
Inflation is regarded as a bad process because it leads to distortions and problems in an economy. A short list of the key disadvantages of inflation includes the following:

Losses to savers: If you save your money by hoarding cash, inflation erodes the purchasing power of the amount saved. For instance, 100 put underneath a mattress ten years ago can now purchase only one third of the goods and services that it could have done in 1987. Even if you save in the form of savings deposits which pay interest, the interest may not be enough to compensate you in full for inflation. This also applies to pension planning, where a person may, for example, save for a pension during his entire working life, just to find at the end of his career that his savings have been eroded by inflation.

Losses to people with fixed incomes: People with fixed incomes (such as the interest on a fixed deposit, or a fixed salary) find that the purchasing power of their income diminishes over time. The wealthy, in contrast, can usually partly protect themselves against inflation by investing in assets, such as shares or property, which increase in value during periods of inflation. Inflation therefore leads to an increase in the disparity between the wealth of the "haves" and the "have-nots", or the rich and poor.

Losses to taxpayers: If your salary increases in line with inflation, and no adjustments are made to income tax, you will shift into a higher tax bracket and end up paying a larger share of your salary to the taxman. This means that Government gains control over an increasing proportion of society's resources without formally getting the approval of Parliament to raise taxes. Confusing price signals to producers and slower expansion of businesses: A higher price for a product would usually indicate that people want more of it, that more profits can now be made from it and that more resources should therefore be employed to produce it. In times of inflation, however, an increase in the price of a product can occur either simply as part of the regular inflation related adjustments to prices, or because the demand for that product has risen permanently.

The easiest way to defeat inflation, or rather the effects of inflation, is to invest in your budget.

What I mean by this is to focus on your expenses. Where your money is being spent and then reduce that amount by at least the inflation rate. For example, if you're currently spending 1,000 a month and inflation is running at 5% reduce your monthly spending by 50 to 950.
The beautiful thing about cutting your expenses is that it's easy to do without having any real effect on your current standard of living. Yes, some expenses such as Council tax and mortgage payments are fixed but it is possible to reduce food bills, travelling expenses, entertainment, life's luxuries etc.
For example -
If you have a generous nature and always buy drinks or food for people, be 75% generous instead.
If you regularly take a taxi, walk once a week or occasionally use public transport
If you spend 100 or more a week on groceries, it's easy to cut a basket of goods by 5% -10%, and again this takes almost no time or effort.
Similarly with holidays, you don't have to stay at home just choose a slightly cheaper resort, hotel or flight.

Ways to Defeat Inflation For The Long Term
Buy a house.
If you buy a house today, you are automatically hedged for inflation. Your house is a fixed asset and any kind of fixed asset becomes more valuable with time thanks to all around asset inflation.
Consider landlording.
If you invest in real estate today and become a landlord, you’ll be happy to know that rents are subject to inflationary pressures as well. You have the capability to raise rates when the cost of living goes up everywhere.
Build or preserve your earning power.
If you are in a position to earn, the best way to battle pricing increases is to keep job or some other income stream going. You then expect wages and earnings to go up along with everything else. Without earning power, you may want to consider other ways to protect yourself from inflation, such as amassing appreciating assets.
Own your own business.

Once you’re a business owner you can always raise rates, fees, prices along with the costs of operating your business. This is yet another reason to escape corporate serfdom.
Keep a diversified investment portfolio.

Keep a core portfolio of stocks and bonds, and if you’re a bit more adventurous, you can reserve a small amount of your portfolio to inflationary hedges such as precious metals, commodities and real estate.
Cut your spending even more.
This should be the simplest advice but may be the hardest to follow: think hard before you buy anything. Practice abstinence: when items are priced higher, you’ll be spending more, so try every excuse you can to avoid making purchases. Or change your shoping habits so you buy at lower cost places.
Save. save and save..
Nothing can beat the goodness of save to defeat inflation. Save more and find the best way to save. you can control yourself and you own destiny.

Thanks for visit. Hope you gain some of benefit..

_________________________________________________________

For my Malaysian readers..
Terima kasih saya ucapkan kerana sudi singgah. Saya memohon maaf sekiranya anda mendapati sebarang kekurangan. Saya hanya seorang pemblog baru dan masih belum mengetahui banyak perkara. Saya mohon agar anda dapat memberikan tunjuk ajar dan tips yang bermanfaat dari masa ke semasa. Selamat membaca..

Inflation