Blog News The causes of inflation and how to survive them

The causes of inflation and how to survive them

date June 8, 2020 time 3 min read 608 views

Inflation just doesn’t sound good, does it? Whenever we hear about it on the news, it’s usually tied to a story about how our savings are worth less or products have risen in price — either way, negative associations abound. But what is it, exactly, and why does it happen?

Inflation measures the increase in price of goods and services within our economy. When inflation occurs, prices go up and our dollars buy less. The US Federal Reserve plans for about 2% inflation each year and over the last few years, it’s generally been around that.

However, inflation is not always good or bad. Let’s take the housing market as an example. If you’re a homeowner and the price of your home inflates, your asset has increased in value. But if you were looking to buy a house, you’ll need to spend more as prices have risen.

So why does inflation happen? Let’s take a look at three different causes of inflation and what we can do to stop it from affecting us negatively.

Cost-Push Inflation

The first thing we’re looking at is Cost-Push Inflation. This is when the price of manufacturing increases but the costs are pushed down to the consumer.

To exemplify, let’s talk about Trump’s “trade war” with China. The bottom line is that tariffs placed on Chinese goods have burdened American consumers with an additional $57 billion per year.

Many US manufacturers import materials and goods from China, such as steel. The higher tariffs mean it’s more expensive for American companies to import Chinese steel, so production costs have increased.

If production costs increase, profits decrease. Companies then have a choice: swallow the cost themselves or pass it on to you, the consumer. In most cases, you pay the price.

Demand-Pull Inflation

Inflation is also linked with demand. If people want something and there isn’t much of it to go around, its value will increase. The inverse is also true, as we’ve seen with tumbling oil prices — too much stock, not enough buyers.

You also see this in in companies like Apple. By having a strong marketing department and good products, they put themselves in a position where demand for their products is high. Apple then increases prices because it thinks people will pay extra — and generally, they’re not wrong. Apple has routinely increased prices beyond inflation — up to 20% in some cases — for various entry-level products.

Wage-Push Inflation

The third form is wage-push inflation. This occurs when a company raises wages, but in order to avoid a financial loss, it also raises the prices of its products. Obviously, this isn’t the result of one or two people getting a pay rise, but rather when the company’s hand is forced — for example, through federally mandated increases to the minimum wage.

How to Safeguard Against Inflation

To protect the value of your savings, you need them to yield more than the rate of inflation. The Fed plans for 2% inflation every year, so you need to exceed that figure with the interest you get from your investments. Unfortunately, traditional options like savings accounts and CDs (certificates of deposit) won’t pay much more than 1.35%. Your money then loses buying power with each passing year.

Invest your money, on the other hand, and you can beat inflation and even grow your wealth. Stocks aren’t your only choice, either — there are lots of alternative investment products to choose from, one of which is secured peer-to-peer (P2P) lending.

You lend to a borrower who has put up collateral in return for a loan, paying interest rates three or four times higher than inflation. We have two investment options available and both comfortably beat the average rate of inflation. Our first option, Flex, will net you 4% APY. It’s great if you’re new to P2P lending as you don’t need to set any terms yourself, and you can deposit and withdraw money whenever you want.

If you’re after a higher return, take a look at our fixed-term investments. You get three fixed terms to choose from and a secured return of up to 7.5% APR.

Whatever you decide to do with your money, the worst thing you could do is leave it in a bank. Yes, it’s covered by FDIC insurance, but it’ll bleed value with each passing year. In effect, you’re paying an inflationary premium for the protection of your money. But, if you can tolerate a little risk in return for a much larger return, you can beat inflation and have a nice little nest egg.

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Peter Upton

Peter Upton

Community Manager

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