We hear a lot of about inflation (a general rise in prices) and how it gradually lowers the purchasing power of our present-day dollars. There was an occurrence a few weeks ago that illustrated this principle to me quite clearly.
BUYING PEANUTS AT THE LIGHT
On a normal day, regardless of where I go, I tend to take the same routes – routes with the least amount of traffic. Prior to the recent pandemic, I would occasionally put aside $3 to purchase 3 bags of roasted peanuts from a Rastafarian near my home on my evening commutes. For years the price of these bags had been $1 and largely remained unchanged.
Last month, while on on my evening commute, I saw the same Rastafarian who I normally patronized with my $3. I should mention here that as I have barely left my home in over a year, this was the first time since early 2020 that I had to opportunity to patronize him. I take out $3 and give him my “bring the peanuts” wave, which he at this point was very familiar with. The exchange that followed went like this:
Me: Hey man, how’s it going? I’ll take 3 bags
Rastafarian: (looking at my $3) Nah bro, these now cost $2 each or 2 for $3
Me: (totally shocked while green light is coming) umm, I’ll take 2 for $3
Rastafarian: (takes money and drops bags onto seat) Alright, Blessed!
What just happened was not lost on me. This was inflation! My $3 now had less purchasing power in May 2021 than it did just just over a year ago in February 2020. In February 2020, my $3 could purchase 3 bags of peanuts, while in May 2021 it could only purchase 2 bags of peanuts. If I had only $2 a year ago, that $2 could purchase 2 bags of peanuts whereas now, it can only purchase 1 bag. A year ago, $1 could purchase 1 bag of peanuts; now $1 cannot purchase anything!
Now, many will read my story above and think “Surely you can afford the $4.50 to get 3 bags of peanuts!” But what if I didn’t want to? What if I only had $3 to spend due to a tight budget or otherwise? This would then mean that while the cost of a bag of peanuts has increased, the money available to purchase the peanuts remained the same. It is here that most people feel the impact of inflation. If income does not increase with prices, people will either get less items for the same amount of money, or they will have to spend more of their money to get the same number of items as they did before.
HOW TO OVERCOME INFLATION
But the question now isn’t whether inflation is coming, because it is. This is an economic fact of life. Rather, the question is what can we do about it. Obviously as a matter of monetary policy, the central banks and other monetary authorities will seek to put measures in place like higher interest rates to control inflation. But day to day, the average person likely won’t be concerned with what their central bank does; they’re too busy battling with increasing prices. So, what should the average person do – the experts say invest.
On this point, a mindful investor would research which investments will help him/her to benefit from inflation or to beat inflation (i.e. stocks, real estate). Only invest in only what you understand; so get knowledge but in getting knowledge, get understanding. Understand the risk involved. Get professional advice. Watch out for get-rich-quick schemes and shams.
A FINAL THOUGHT
It is acknowledged that my story above is an ‘on the surface’ explanation of how inflation works. Also, it should not be taken for granted that many persons may not know how to invest or feel they don’t have the money to invest. On this point, there should be a bigger discussion on the need for financial literacy for persons in the middle-income and lower-income groups. There should also be discussions on the cultural and systemic factors which may or may not allow or encourage everybody to invest.
But make no mistake about it, if inflation has not come yet, it will. What will you do about it?