Inflation

3 Reasons why inflation is good for you. Inflation can help you spend less; save more; and invest for the future.  

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What is inflation?

Simply put, inflation refers to high prices. Prices respond to the economic principle of supply and demand. When demand is high, and supply is low, prices are high. When supply is high, and demand is low, prices are low. As you can see, demand (i.e. people wanting to buy something) is the primary trigger for prices. Supply or availability is relevant if there is that buying pressure or demand. 

Where is the current inflation coming from?

COVID, Russia, and Liberalism. The current inflation is coming from the response to the COVID19 pandemic; Putin's invasion of Ukraine; and liberal or progressive policies. The current inflation is mostly due to the response to the historic and unprecedented COVID19 pandemic. Part of the inflation situation is also due to Putin's invasion of Ukraine. Finally, liberal or progressive policies pushing for higher wages and social security benefits also influence prices.  

Out of the three reasons above, the human response to the COVID19 viral pandemic is the primary cause of the current inflation. COVID outbreaks and lockdowns reduced industrial output and disrupted transportation of goods (supply chain logistics) for about two years worldwide. Some businesses and service providers went out of business during the pandemic. All this contributed to a reduced supply. It will take about a year to recover from those two years of COVID supply side impacts. 

The COVID19 lockdowns also allowed many consumers to save money for post-pandemic increases in demand. For many consumers, income did not decrease during the lockdowns, but opportunities to spend money on products and services did decrease. This resulted in considerable savings to increase post-pandemic demand. The COVID19 stimulus payments and "free money" programs in the United States and other rich countries also contributed to oversized savings for increased post-pandemic demand. Once the pandemic ended and lock downs went away, consumers raced out the door to buy the relatively limited goods (products and services) available in the marketplace. When demand exceeds supply, prices increase. That is what we are still seeing in the current inflationary market.

Putin's invasion of Ukraine contributed to price increases in certain commodities such as wheat and other cereals because Ukraine is a major producer and exporter of wheat. The invasion also contributed to higher oil and natural gas prices because Russia is one of the main producers and exporters of fossil fuels in the world. The economic sanctions in Russia operate as an artificial or legally imposed restriction of Russian supply, which increased the price of non-Russian fossil fuels due to operation of the law of supply and demand. 

Finally, progressive policies such as high wages and fringe benefits for employees also contributes to higher prices. Businesses need to recover the high labor costs, and increase prices to do so. High wages and benefits increase the quality of life for workers, which is okay, but undeniably contribute to higher prices. Not surprisingly, prices in first world countries tend to be higher than in third world countries where employees earn significantly less. 

Why is inflation good for you?

Inflation motivates you to buy less, thus helping you save money, which you can invest in your future. Conventional wisdom has it that high prices are bad for you. You are supposed to be this compulsive consumer shopping and buying cheap stuff all day. Most of our homes are about to explode with so much junk that we buy every day. Overconsumption is killing the planet just like overeating is killing us. Low prices only make the problem of overconsumption worst. 

High prices are a wake up call. They make you think and analyze whether you really need that thing that you thought about buying. As you know, it's the anticipation of buying it what makes us happy. We get this dopamine hit from imagining the reward. When we actually get it, the dopamine hit is less and that's why we don't enjoy things as much as we thought we would. We immediately go chasing for more dopamine imagining the pleasure that the next purchase will bring us. That feeds into a vicious cycle of overconsumption. High prices can help us out of it by serving as an intervention or reality check helping us reach bottom in our consumption addiction.

Use inflation and high prices as an excuse to consume less. Save more money. Invest more in your future by improving your health and your education. You are a person who consumes to live, rather than a puppet to live to consume. What do you think?

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