You would have noticed the prices of food and vegetables going up if you are a regular in shopping for household essentials… Not just the rising prices of petrol, but the rising costs of essentials – food and other retail necessities – as well, are an indicator of the economy’s condition.

What is it and why is it happening?

What we are currently facing is inflation. You must have read articles on how our country is at its highest inflation rate @ 7.79%.

What does that mean?

Inflation is the rise of the price index of an economy. When the demand for a commodity or service rises, without enough supply to suffice it, the prices rise. Because of this, the economy suffers since there IS demand, but not enough purchasing power to pay for it. This cycle then temporarily slows down the growth cycle.

For example – the same lemon that would be Rs. 3-4, cost about Rs. 8-10. Petrol costs Rs. 108 one month, 112, the next. With this, not just business expenses, but overall lifestyle expenses go up.

Most global economies are reeling from a similar issue.

Why is it happening?

Inflation, in general, occurs due to one of three reasons:

1. Rising prices – when the cost of production rises, the manufacturers compensate for it by increasing the prices of their products – letting the consumers take the brunt of the rising costs. This leaves lesser purchasing power to the consumers.

2. Rising demand – When the demand for particular commodities increases, and the supply chain is unable to keep up with the said rise, it leads to a rise in prices – resulting in inflation.

3. The third is a vicious circle of the wage cycle. This happens when the labour demands a hike in their wages to suffice their lifestyle needs, thus impacting commodity prices, which eventually leads to more demand for hikes.

The current scenario: There is no one reason behind the rising prices, but a key factor has been the Russia-Ukraine war. Both being important nations in international trade, there is a global disruption faced in imports and exports, which impacts the supply chain.

But that’s not all. With a global slowdown due to the COVID-19 pandemic, businesses were already suffering. Global inflation rates had started shooting up right from 2020, which were only aggravated by the war.

Also read: Passive Income – A Step towards Financial Stability

So, how do you manage your expenses with these rising prices?

Inflation creeps in slowly and fades away slowly. One needs to be patient, not panic and deal with a rational mind.

To ensure that inflationary conditions don’t hit you hard, here are a few things you can take care of:

1. Following a strict budget:
   Disciplined expenses come in handy big time in a tight economy. It is important to be mindful and watch your expenses in such a situation. Don’t spend more than you need. Don’t spend more than your means. The resultant smaller savings will come in handy.
2. Prioritizing expenses
   In an inflationary economy, where you cannot control how much you spend on essentials, you can cut down on unnecessary spending. The key here is to continue saving the same amount of money as you were earlier. Eat out less often. Step back on shopping unless absolutely necessary. Find alternative solutions like free or low-cost online courses and more.
3. Don’t touch your contingency funds
   If you have been saving up for an emergency corpus, do not touch it. Inflation leaves you with less money in hand, so it is best to work on spending less, not on saving less. Usually, the first step people take is stopping their investments, even liquidating them, so that they do not have to cut back on lifestyle spending. But adjusting a bit for a few months isn’t a big deal, is it?
4. Adjust your debt repayments
   If you have borrowed a personal, student, or any type of loan, see if you can reschedule your repayment plan. While you may not be able to cut back on all expenses, putting off your debt repayment for a while can give you some breathing space.

Also read: How does a Neobank work?

The last word:

Inflation doesn’t last. It is a phase every economy goes through now and then. Every economy follows a cycle from prosperity to recession and back. How long the economy stays in each phase depends on the policymakers, the market conditions, and other factors. 

Inflation is not inevitable either. And it is not always bad. They say anything in excess is dangerous. But for economic growth, an average 2% inflation rate is considered to be healthy. Too low, and it leads to a reduction in prices. Too high, it leads to a rise. The key is maintaining a balance and taking the required actions when there is an oscillation either way.

Also read: Difference between a fixed deposit and recurring deposit