We talk about it regularly. But you have only a very vague idea of what it’s all about. And you ask yourself What is inflation? You’re doing the right thing. Because understanding it can help you to interpret the news or not give in to simplistic speeches. A little guide to inflation.
Let me tell you a little anecdote…
That night, I went shopping in my usual store, just like everybody else. I head to the breakfast section to get my favorite box of cereal.
So far, so good. Nothing abnormal to report. The little background music is still pleasant, the lights in the store are comfortable for the eyes and the clerks are still friendly and smiling.
I grab my favorite cereal box …
And there, it seems to me that there is something wrong …
The box is just the same. The design is the same. The colours are as usual. The mention “family size” is still present and the price is the same. However, the box seems to have shrunk strangely. I take it anyway and continue shopping. But this strange feeling of having been tricked remains…
Luckily, I had an identical box of cereal left at home. So I can be sure of that.
Here’s what I discovered when I got home…
The old box of cereal, the one on the left, is 850 grams. And the new one, the one on the right, is only 700 grams. Let’s not forget that the price hasn’t changed…
So that’s a nice price increase of about 18%.
The cause of the price increase? Inflation.
In this case, it was “hidden”: the price is the same but the quantity has decreased. In general, it is more simply prices that increase. But it doesn’t matter: whether inflation is hidden or not, it remains the same phenomenon.
Businesses have to be ingenious to increase their prices subtly, otherwise customers will complain and go elsewhere. But is it really different elsewhere? Not really. Still, companies are using new techniques to increase their prices, such as “smaller sizes” to retain their customers. Rising food prices are at the root of this phenomenon.
Prices are constantly rising and will always rise. Whether it is food, gasoline or real estate, almost every year the price will be higher than the previous year.
What is inflation?
Wikipedia offers this definition of inflation:
the loss of the purchasing power of money that results in a general and sustained increase in prices. It is a persistent phenomenon that causes all prices to rise, and to which are superimposed sectoral variations in prices.
What is important to remember is that inflation is the sustained and general increase in the overall prices of goods and services, which can vary from one product to another (e.g. energy falls while tobacco rises).
Inflation can be caused by different factors :
- Demand inflation: prices rise because of very rapid growth in demand.
- supply-side inflation: prices rise due to rising production costs, often linked to increases in the cost of raw materials or wages.
- the multiplication of the money supply
Explanations of inflation can be a bit complex, especially since not all economists agree on the subject. But this gives you a good idea for everyday life.
Who benefits from inflation?
Those who benefit from inflation are mainly those who own the assets. In other words, it is the shareholders of companies in the consumer goods, raw materials and energy sectors.
There are also precious metals, which perform exceptionally well in times of high inflation. In fact, I explain this very well in this article.
Those who borrow from banks also benefit from inflation, such as governments or large investors. The money you borrow today will be worth less five or ten years from now. So it’s to your advantage to borrow now to make an investment such as buying real estate.
On the other hand, those who are getting poorer with inflation are the small savers and average consumers. Every day, they lose purchasing power because prices are rising much faster than salaries.
Today, the savings account is no longer even enough to protect one’s money against inflation. This means that year after year the saver is poorer and poorer.
How can we take advantage of inflation to get richer?
Invest on the stock market in shares of companies with high dividends, invest in raw materials such as oil, gold, copper, cotton and wheat. Borrow to buy real estate, whether it’s a parking lot or a rental building.
The important thing is not to let your money die slowly in a common savings account, because with ever-increasing prices and stagnant wages, you’ll have to work for the rest of your life.
I hope this is not what you want.
How do you feel about it? Have you ever had a similar anecdote to mine and do you think it is possible for inflation to work in our favour?