Inflation finally hits double digit in June with 11.4%, brought about by relentless oil price increase in the world market hitting a market high of $145 per barrel.
When inflation is high, what does it mean for the common people?
- Inflation eats up the purchasing power of your money. As prices of basic commodity increase, you’ll find yourself spending more for the same basket of goods you’re buying.
- Spending more would mean increasing the money supply in the market. As most people will continue to eat, drive to work, and spend everyday- more money will float in the market.
- When inflation is high, central bank tends to increase Interest Rates to control the money supply in the market. With high interest rates, people will think twice before buying goods which they have to pay with interest rates. With this, central bank hopes to reduce the money supply in the market, and hopefully curb inflation.
- If inflation is high; Interest Rate is high. Then interest rates for auto loan, housing loan, personal loan, etc will also increase — So, is it best to buy a new car, a new home, and get a loan during high inflationary period? — if your paying cash, go right on.. but, if you’ll pay the mortgage or monthly amortization — may not be a wise move.
- Inflation is not all negative — again, there will always be two sides of a coin. As a consumer, high inflation will definitely beat you down. But as an investor (if you have existing investments in the money market), high interest rates will work to your favor. As central bank increases interest rates, banks should follow suit by increasing their Time Deposit Rates, Bills and Bonds Rates, etc. What is the logic? With banks now offering attractive interest rates, people will save more and put more of their money in the banks than spend it — again, solving the problem of too much money supply in the market.
