Thoughts on Inflation

I remember hearing about inflation on the news when I was growing up as a child in the 80s. But I never understood what it was. It sounded like some ultra-boring financial topic that didn't impact me or my life.

Fortunately, up until recently it has had little impact on my life.

But that has all changed now.

The Real Impact of Inflation

I remember when I lived in East York in Toronto, I had a neighbour who I really didn't like. I somehow found out through a real estate connection that even though the house prices on our street had risen quite a bit recently, he was still underwater in his mortgage because he bought his house at the peak of inflation in the late 80s.

That really sucks for him. The housing market has since increased and he is not underwater anymore.

Today, inflation seems to have percolated down to the average person in a way that it didn't previously. I think a large part of that is because its not just contained to the evening news. It's being posted about on Facebook, Reddit and TikTok – and that's bringing the awareness of inflation to a wider audience.

However, at the same time, the understanding of inflation is still obscure to most people. Most people think of inflation as the rise in the prices of consumer good, namely groceries. And while that's a big part of it, it's certainly not the whole picture.

So what is inflation?

 Inflation is defined as “a general increase in prices and fall in the purchasing value of money” and traditionally inflation is measured in year-over-year change.

The Ugly Truth About Inflation

Inflation is a subtle way for governments to steal your wealth.

In times of high inflation, its best to park your wealth in hard assets that are inflation resistant, such as real estate, cryptocurrency, art, precious metals like gold and silver, and any other store of value.

Because the poor and middle class own the least of these assets, they tend to bear the brunt of the force that rampant inflation has on an economy.

I should point out the mathematics on this.

If a government keeps printing more paper (fiat) money, without creating any value, the value of ones own currency becomes less. That's basic supply and demand.

And it can easily snowball out of control. Look at the effects of hyperinflation in Post-war Germany, when people were using a wheelbarrow full of paper money to pay for a loaf of bread.

Or look to Argentina where the inflation rate is expected to be 100.70 % by the end of Q1 2023.

Scary stuff.

In Portugal, where I am currently spending most of my time, I recently estimated that although groceries are much less expensive here than in Canada, the price is about 20% higher than when we first came to Portugal a little more than a year ago.

Speaking of Canada, iceberg lettuce is now nearly $6. And there are Reddit groups that are posting the incredulous cost that groceries have risen.

This beef roast has a price tag of over $100 CAD which I saw on Reddit.

But these is even more that is going on with inflation.

Inflation Part Two

Inflation is reported as a basket of goods and areas of the economy. But that basket does not reflect what the majority of people spend their money on. And that by design. The government can report lower numbers (and generally cause less panic) by under-reporting the groceries for example and balancing that out with other sectors that can make the overall inflation numbers more palatable. That is precisely why you may hear a number reported at the official inflation number, or hear the phrase “goods and services have risen x percent in the last quarter.” And yet feel that those numbers are lower than the price increases you see at the grocery store.

Just this month, I was informed that ACP, my insurance company, was increasing my monthly premium. And today, I got an email from my cell phone provider. I wanted to share the message with you, which is translated from Portuguese.

In recent months we have been witnessing a substantial and general increase in prices, which has had a strong impact on family and business budgets. The telecommunications sector was no exception, having also been significantly impacted, especially with the increase in energy, fuel, logistics and equipment costs, the latter very much related to the shortage of chips, fundamental in our sector of activity.

This has been a reality since 2021. So far we have been absorbing this increase in costs, not reflecting it in the prices of our services. However, in order for us to continue to provide you with a quality service, it is inevitable that we update the monthly fee for our services, as contractually provided for.

In this way, following our previous communication and after publication by INE – National Institute of Statistics of the last Consumer Price Index for a complete calendar year, with reference to the date of this communication, we inform you that the monthly fee for your service no. [phone number redacted] will be updated by 1.00 Eur, VAT included.

– MEO Telecom company

In the end, the cost of inflation gets passed down the line. Businesses raise their prices and the person who is the end consumer bears the brunt of the effects.

But it gets worse

Remember that definition of inflation in the beginning of this article? Well, the US government has decided to CHANGE yet again how it is reported. (Yes, they changed how it is calculated before, and they change the weighting of each basket of goods.)

Inflation is now going to be reported based on only 1 year of previous data instead of two. And maybe that does not seem all that different. But because inflation is on such a climb right now, that change changes YOY inflation from 14% down to 6% according to this report. Comparing to only one year of data in periods of higher inflation, will lead to lower numbers.

Thats why its important to always know whats going on with inflation and your money.

Always look to the numbers. If you want to see some of these numbers and how they effect inflation, and your savings, I would recommend you check out some calculators to help you see the overall impact on your life.
I know that it might not be the most fun thing in the world to see how much money you're losing from inflation, but its too important a subject not to look deeper into.

So what can you do to combat inflation

First, don't put your head in the sand and not think about inflation.

Run some numbers and see how inflation is having an impact on you. Without awareness, you cant take precautionay steps.

Second… I recommend you research starting to DCA (dollar-cost-averaging) into Bitcoin.

Bitcoin is a good store of value, and is selling at a sharp discount right now. I use Shakepay to DCA every week without having to pay attention to the market. (Shakepay is only available in Canada. If you are not in Canada, you can use this instead.)

I also recommend to diversify your portfolio. Invest in stocks of good companies or into ETFs.

And lastly, keep some of your savings in peer-to-peer lending. This type of investment is non-correlated to the stock market so it can be booming wven if the stock market is struggling.

And final tip – don't keep your money under your mattress. That's where it loses value due to inflation.