Last Updated on September 2, 2022 by Daniel Cardoba
Inflation is one of the most important economic terms that people must understand. It describes the rate at which prices change over time in an economy. When inflation rises, it means that you’re going to be paying more for your goods as time goes by. So what happened, and why did inflation become out of control?
The global pandemic, also known as COVID-19, was a huge global crisis throughout 2020. This resulted in a sharp decrease in consumer spending, particularly on durable goods like cars, electronics, and furniture. The resulting drop in demand led to a significant increase in unemployment across many developed economies.
This created a strong incentive for governments around the world to implement stimulus packages to combat the situation. Many countries implemented temporary tax cuts or tax holidays to encourage citizens to spend money again. Not only that, they printed money out of nowhere to help the people who were affected by lockdowns.
However, these Quantitative Easing (QE) measures caused longer-term problems like inflation. One of the main factors is the fact that central banks around the world kept interest rates very low during the pandemic, which was designed to encourage borrowing and investment.
As a result, businesses were able to access large amounts of cheap capital, which allowed them to build plants and expand their workforce. This gave many industries a boost, but unfortunately, inflation spiked as a result.
Combined with the ongoing war in Ukraine-Russia that caused a big mess in the gas and wheat supply, the inflation became even more out of control.
Why Does 2022 Have Such A Big Issue With Inflation?
During the pandemic, some economists were confident the massive amount of stimulus being provided by governments around the world would not affect inflation permanently.
They believed that companies would have plenty of cash reserves to continue investing in new factories and equipment and that consumers would feel less likely to buy luxury items like cars and houses as the number of people out of work increased.
Unfortunately, this forecast turned out to be wrong. Companies continued to invest heavily to keep up with production needs, but the majority of consumers felt too insecure about their financial future to spend much money. With a massive amount of cash lying idle, businesses struggled to find ways to make it useful. As a result, businesses started hoarding cash to use later in the year.
Companies started selling off assets, which also contributed to the rise in inflation. Since the end of the pandemic, central banks have continued to keep interest rates low to encourage companies to borrow and invest.
At the same time, the US Federal Reserve has also introduced quantitative easing (QE), where it purchases trillions of dollars worth of bonds from financial institutions. These bonds will then be used to fund government projects.
All of these factors combined to create a huge pool of liquidity that businesses could tap into. But with all of this extra cash floating around, businesses struggled to find ways to use it. Instead, they just sat on it, contributing to rising inflation.
And then, the war in Ukraine broke out, and both sides used their international trade as a form of weapon. The rising cost in natural gas and even wheat have exaggerated the inflation problem.
What Do Countries Need To Do To Fight Inflation?
One major challenge that governments face is how to stop inflation. If they raise taxes too soon, they risk driving businesses away from the market and sending inflation soaring. On the other hand, if they don’t raise taxes soon enough, businesses would hoard the cash instead of using it to expand and hire new staff, causing inflation to stay high.
Many countries decided to wait until the pandemic was under control before implementing any new policies. Some countries implemented stimulus packages and stimulus programs, while other countries opted for quantitative easing. All of these actions caused massive inflation issues.
The Fed opted to raise interest rates for the US dollar in order to help combat inflation. Right now, the current interest rate by the Fed is 2.25% to 2.5%. Many analysts predict the Fed will keep raising interest rates up to 3.5% or even more. They have no other tool to combat inflation.
What Can Individuals Do In A Time Of High Inflation Like This?
If you’re concerned about inflation, the best thing you can do is to avoid buying expensive goods and services. Instead of trying to save money by buying cheaper products, you should focus on purchasing things that actually provide value. For example, if you want to buy a coffee maker, look for something that’s made of stainless steel or cast iron rather than plastic.
It may seem counterintuitive, but if you want to purchase a car, you should go for one that’s older rather than newer. Also, look for cars that have been sitting on lots for a while since they’ve been discontinued. This is a great opportunity to buy a brand-new car for a fraction of its original price. Try to save money and put your savings in proven fiat currencies (such as USD or SGD).
You may also want to consider moving closer to a city center in order to take advantage of lower living costs. You’ll also want to avoid short-term renting if possible, as rent tends to increase faster than wages.
It seems obvious, but don’t let yourself fall victim to inflation. Until we see more certainty coming from the macroeconomics side, just stay as disciplined as possible with your living cost. Even though the stock market has been recovering from mid June, it is very important to stay vigilant. Especially if your cash reserve is thin, you should be super careful with everything.
You can also read our personal money management article guide, this might be beneficial to help you navigate the hard time of 2022’s high inflation era. I wish you the best success!