The challenge with inflation is that it increases the cost of living. When uncontrolled, inflation can be very damaging. And if economics is primarily about human behaviour, then uncontrolled inflation damages consumer and business confidence, which are the platforms upon which economics rests. And inflation — according to the United States Federal Reserve — is back.
The reason for the return of inflation has been put down to many years of quantitative-easing stimulus, which includes central banks’ 2008 pumping of cash into the global marketplace in an effort to prevent financial collapse as well as today’s pandemic-driven stimulus. The present quantitative easing is an effort to avoid recession and even depression from a world terrified by Covid-19.
A depression would lead to business shutdowns, bankruptcies and millions of job losses. Hence, policymakers use the instrument of quantitative easing — increasing the quantity of cash in the marketplace through the selling of government bonds and various treasury instruments to investors — in an effort to drive greater consumer spending and prevent business insolvency. Government bonds are the most secure investment in the global marketplace.
In the Virgin Islands, the idea of government stimulus is an analogy of what the US Federal Reserve attempts to achieve in activating the instrument of quantitative easing to prevent a US depression.
Today, there is an imbalance in the cash in the western marketplace: There is more cash than the goods and services the cash buys. This leads to rising prices. This is what is driving inflation.
Can consumers protect themselves against inflation? That is not a simple question with a simple answer.
Any income increase that matches the cost-of-living increases that inflation generates does the job of protecting the consumer. But for those on incomes that cannot be adjusted for inflation, which means the majority of consumers, inflation means higher prices and higher costs of living.
For residents on fixed budgets — retirees, employees on fixed wages, and so on — inflation means life gets more expensive.
Residents who can push the increase in inflation on others such as their customers, clients, tenants, home buyers, hotel guests and travellers can cushion the effects of inflation.
Investors have ways to protect their wealth from inflation, such as moving it into more secure investments like established index funds, government bonds, treasury notes, and such.
Historically, land prices rise with inflation and landowners may be protected from inflation.
However, interest rate rises frequently accompany inflation. Home and business owners with mortgages and commercial loans that are not fixed may get a shock increase in their interest payments. The preceding is negative fallout from inflation for consumers.
Winners and losers
Who wins and who loses in the inflationary environment? If the US Federal Reserve increases interest rates, then rates worldwide may go up. That means all of us who borrow on car loans, home and commercial mortgages, bank loans, and credit cards, may see life getting more expensive.
Savers, on the other hand, may see their cash in the bank receive greater returns as rates rise.
There is a catch-22: Savers may see their rate of returns rise only to spend that extra cash on more expensive goods and services. Inflation is a complex beast.
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