what is inflation and why it makes you lose money

Today I wanted to cover a topic that has been all over the news and media lately. It is a word that all of us hear a lot however different people have slightly different understanding of what it actually is. Something that makes some of us struggle to sleep at night while others are trying to find ways to mitigate the extra costs this create on your wallet (or most likely on your card). And yes, you might have guessed it by now (or read the header of the article) – I am referring to the term INFLATION.

what is it you ask?

Official terminology for this is somewhat confusing…. similar to many financial definitions and slang that I believe many of us should actually know and understand. The end of the day – all of these things really matter and have a really significant impact on every single one of us. “Inflation is the decline of purchasing power of a given currency over time” is the way Investopedia or Wikipedia would describe this term.

One might say – this doesn’t really make much sense as £20 in my pocket is able to buy me a basket of goods on any given day. And you would be spot on right – money remains money and will buy you goods. The problem that inflation actually refers to is the size of that basket of goods that you will end up taking home with the same amount of cash on two different days.

You probably would have noticed how prices of some of your favourite items went are going up over time. It isn’t only items in grocery stores though as prices keep going up on average for most goods including clothing, entertainment and leisure, utilities, etc. And this is exactly what inflation rate is showing – how much more the same basket of goods will cost you (normally measured annually implying how much the prices went up compared to the same time a year ago).

The topic that is currently on everyones mind – energy prices. For those of you who drive – you have definitely spotted the difference at your usual petrol pump. The bills we pay for gas and electricity are going through the roof right now. My mobile phone tariff went up by more than 10% a couple of months back. My SIM card provider increases their prices annually based on the inflation rate combined with 3.9% annual rise.

Have a think – how many things you spend your money on have actually gone up in price over time? I am sure there are many examples you can come up with of your favourite pack of biscuits becoming more expensive or the restaurant around the corner that serves the best burgers around recently making the portion of chips £0.20 more expensive.

And yes, those are the sorts of levels of price increases that I am referring to. In some instances it will be even less if you are looking at price changes on your grocery items. It doesn’t seem like much at first but if you start adding up all those small changes it does come up to a significantly bigger value.

An interesting experiment can be the following – take the receipt of your big weekly shop and just round up every single price to the nearest £x.x0. So for example, a can on lemonade that costs 52 pence would be rounded up to 60 pence. It definitely isn’t a massive increase, it’s only 8 pence some might say. However doing so on a large weekly shop that costs someone around £120 you might find a £5 difference. This is just under 4.2% price increase. If you start applying the same level of increase to everything you spend your money on – I can promise, the final figure will shock you.

can inflation be good?

So by now you will say – I clearly made my mind, inflation is definitely bad and does no good to anyone. I will have to stop you there! While inflation will harm all of us from one end of the spectre there might also be a benefit that you are getting from it without even realising so.

For the fortunate ones of us, a great example of positives that inflation creates is the price of the property that you own or paying mortgage for. As everything gets more expensive the properties show the exact same characteristics. It is crazy to open a web site that shows you the history of properties sold (enter postcode here and see the price history) – if you find a house that has changed hands many times from lets say 70s or 80s I am fairly confident there will be a lot more grey hairs on your head compared to just 5 minutes ago.

The benefits are seen not only by the ones who own properties which I hope will be a bit of positive news for you. Many things that we own or do might be appreciating as well. While things like old cars will probably come to mind straight away to many of us, things like a collections of old stamps or coins won’t necessarily come to mind straight away. The odds are really in your favour that some of these collectibles have increased in price way ahead of the inflation if the collection was of real quality to start off. 

The same applies if you are working in services providing industry – I am sure you have increased the asking price for the work that you do over the past years… if you haven’t done so recently, I would strongly encourage you to review your pricing and make sure you are getting a fair deal for the work you provide.

And if none of the above applies to you, there are even more good news – there are secrets and ways you can actually beat the inflation in the long run through investments. I will share more ideas and tips of what you can start doing today in order to beat the inflation in one of my coming posts as I am sure since you have ended up reading this article and got this far it will be something you will definitely be interested in.