Inflation is a topic that is discussed on the news daily and felt directly by consumers. It’s an issue that affects nearly everyone. If you are wondering what’s going on with the higher prices, the following are some common questions about inflation to help you understand the current economic climate.
Inflation occurs when the prices of goods and services increase. When inflation is high, it can have a negative impact on your cost of living.
During periods of higher inflation, you might spend significantly more money to buy groceries, fill up your gas tank, dine out, and buy other things that you need and use. If companies are slower to increase workers’ pay to account for the rising prices, it could result in a lower standard of living until prices stabilize and wages catch up.
Inflation typically begins when the demand for goods or services is greater than the supply, according to Parris Hall, Head of Wealth Banking Solutions at TD Bank. As a result of the Covid-19 pandemic, which continues to this day, supply chains became strained. The supply of many consumer products decreased—like computer chips, lumber, household products, and certain groceries—but the demand for many consumer goods remained constant, and in some cases increased, as consumers aligned their spending to their interests and priorities, while also placing a focus on improvement projects.
Another common cause of inflation is when the cost of producing goods increases and companies pass the cost on to their customers. This is common in the auto industry. Over the years, significant gains in vehicle safety, reliability, and fuel efficiency have been made. The cost of these advancements has been passed on to car buyers in the form of higher sticker prices.
Finally, inflation also occurs when the government increases the money supply. In just the past two years, for example, the government increased the money supply by several trillion dollars to deal with the Covid-19 pandemic. When more money is added to the economy, it causes purchasing power of the dollar to decrease.
When inflation occurs, the prices of many goods and services do not typically return to previous levels when the inflation rate levels off. This isn’t always the case, however. The prices of some commodities—like oil, agricultural products, raw materials, and others may decrease as the supply chain returns to normal and production increases.
It may be beneficial when it is steady and mild. When consumers expect prices to rise, for example, they will go ahead and buy products instead of waiting. Steady demand is beneficial to businesses that both produce and sell products. It helps to keep unemployment low, which in turn grows the economy.
Another potential benefit of mild and steady inflation is that falling prices (deflation) are no longer a problem. When deflation occurs, many people wait to buy things to see if prices will continue to fall. This causes a reduction in demand. Factories and businesses respond by producing and carrying less inventory, which could cause an increase in unemployment.
If your paycheck isn’t stretching as far as it once did, creating a budget can help you control your spending. It can also help you stay on track to reach your financial goals. You can create a simple budget by writing down your monthly income and allocating portions of it to your expenses.
Cutting back on unnecessary spending is another way to deal with rising prices. Instead of dining out, for example, consider cooking more at home. Also, be on the lookout for free or low-cost things to do in your community to save money on entertainment. Just a few things to consider include:
Volunteering for a worthy cause
Spending time in the great outdoors
Activities at local colleges and universities
The best way to prepare for your financial future during uncertain economic times is to become more informed. There are many sources which you can use to become better informed, including:
Subscribing to financial newsletters, reading your local paper's business section or newspapers focused on more financial issues, such as The Wall Street Journal and Financial Times, and listening to podcasts on the topic.
Many leading financial firms (i.e., banks, brokerage and investment firms, etc.) offer free financial educational and informational resources on their websites
Consider taking a basic financial planning course at a community college or online
Talking to a licensed financial professional
The more you know, the better you can plan for both the present and the future.
For More on Personal Finance Topics
If you have more questions about other personal finance topics that matter to you, visit the Learning Center on TD Bank’s website.
We hope you found this helpful. This article is based on information available in May 2022 and is subject to change. It is for general information purposes only. Our content is not intended to provide legal, tax, investment or financial advice or to indicate that a particular TD Bank product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.