Inflation is one of the latest terms to be hot news, along with recession and the sub-prime mortgage crisis, of course. For most people, inflation as an economic concept may not be clear at all, for their benefit, inflation is price rise across the board in an economy, brought about because demand far exceeds supplies of goods and services. Several indices are used worldwide to measure the inflation rate which is the average increase in prices for a period of one year. A couple of the more popular indices used are the Consumer Prices Index (CPI) and the Retail Price Index (RPI). The CPI measures prices of goods and services excluding housing costs - property and land prices, housing taxes and mortgage payments. RPI is inclusive of all these costs and hence, presents a more realistic indication. How hoes inflation affect you - the individual? For starters, you will find that your money is purchasing lesser than before, even if the amount of money in your hand increased, the purchasing power of that money will steadily fall. How do you then solve or combat inflation? Keep in mind that a 0% inflation rate is also not feasible. A few simple tips are listed below which describe how you can solve inflation at your level.
- Higher prices for goods and services
- Higher tax outflow from your income
- Your savings drop in value
Methods to solve inflation. While inflation as a whole should be tackled by the government's economic policies, there are a few things you can do with your individual budgets, to combat inflation. These revolve around your general household budget, mortgage payments, savings and investments and pensions.
Reviewing your energy expenses. Both gas and electricity prices have shown substantial increases in the last few months, and they are only expected to go up, if the inflationary trend continues. One way to save some money on your burgeoning energy bills is to enlist for capped or combination deals. These deals offer a fixed price (a little on the higher side), but the increased amount you will pay for such deals is much lesser than what you will be paying, should you continue with your current individual plans. Opt for direct debit to pay your energy bills, since most providers will provide a discount on such guaranteed payments. Other ways to cut your energy bills are to invest in alternate sources such as natural gas, solar power, etc.
Mortgage payments. Switch from flexible rates of interest to fixed rates. Short-term interest cuts are unpredictable and it makes more sense to opt for a fixed interest regime, which will stay locked throughout the mortgage tenor.
Household bills. Switch to a single provider for all your communication and entertainment bills. You may now have different providers for landline and mobile telephony, cable or satellite TV services and broadband services for the Internet. With each you will have made some initial deposits and pay individual monthly charges. Instead club all these services with only one provider. A basket of services from one provider will be much cheaper than different services from separate providers.
Savings and investment. Convert some of your savings to index-linked financial products. These will help safeguard some portion of your savings from inflationary effects. The reason why it is not recommended that you convert your entire savings to index-linked plans is because you will lose out once the inflation rate starts falling again. By converting only some portion, you maintain a balance between fluctuating inflation rates. Some other smart investments are corporate bonds.
Pensions. Increase pension contributions every time you get a raise. This will help in increasing your pension kitty and combat rising inflation, since, with inflation; money tends to lose its previous value.
These are some of the individual methods by which you can check the effects; increasing inflation has on your pockets. Don't just adopt one or two methods from the given list, to get the full benefits it is important to use all of the methods simultaneously.