To comprehend the current situation, we must first understand that our economy is inevitably cyclical. Economists distinguish four stages an economy goes through, namely growth (or increase in size,) peak, shrinkage (contraction,) and finally, rock bottom before the recovery (or trough.) After the relative economic prosperity of the 2010s, the US and global economy experienced a sudden downfall with a short-lived recession and inflationary tendencies. This article’s main objective is to analyze the impact of inflation on economy and the effects of inflation on economy.
Table of Contents
- Don’t let inflation pull you down with these bulletproof investments!
- How did the effects of inflation come into existence?
- How did the inflation affect the US housing market?
- How can you tell there is an inflation in process domestically and internationally?
- What are the effects of inflation on economy?
- How does inflation affect us as a society?
- The global economy is on a rough ride to recovery.
Don’t let inflation pull you down with these bulletproof investments!
How does inflation change our economy is today’s topical question. You might also wonder who is affected by inflation. The consequences of inflation hit people from every walk of life. Simple consumers, businesses, mega-corporations, and investors are concerned about increasing inflation. There’s no surprise here, as money has lost its original purchasing power, or in other words, depreciated. Subsequently, people’s real income shrank substantially, seriously jeopardizing their livelihoods. For this reason, we don’t recommend keeping your valuables in cash during inflation.
Instead, consider investing in durable assets during inflation. Let us highlight our top pick, real estate! Properties are hard assets that withstand even the toughest recessions without losing substantial value. House flipping, the rental game, warehouses, or REITs still hold up to scrutiny proving their financial worth.
A good starting point is contacting established local real estate agents for up-to-date information on affordable homes to buy or the best starter properties to invest in.
How did the effects of inflation come into existence?
We can trace back the present financial crisis and the impact of inflation on economy to the Covid-19 Pandemic. The Federal Reserve raised the money supply and introduced various stimulus programs to get the economy back on track. One of their essential assistance was lowering the interest rate to motivate homebuyers, companies, and investors to buy and invest more. Thus, they facilitated a speedier economic recovery.
However, the production of goods and services didn’t get back on its feet entirely. The available limited supply has become pricier because manufacturers, producers, and sellers knew they could ask for a higher price. That was only one of the effects of inflation. Nonetheless, everybody knew this situation couldn’t be sustained for long, and the backlash was inevitable.
It goes without saying the Russian-Ukrainian war also deepened the impact of inflation on the economy because it led to soaring oil prices. The impact of inflation on business should make us realize it’s time to switch to clean energy technology.
How did the inflation affect the US housing market?
During the pandemic and its aftermath, the housing market boomed in select American cities. Loaning money was cheap; thus, everybody could afford homes and properties to invest in. Yet, storms were gathering.
The global shortage of material supplies finally caught up with the real estate market. Building materials became more expensive, and new constructions were put on hold or delayed indefinitely. Soon, Americans had to deal with a painful housing crisis. Seller’s markets replaced buyer’s markets. This triggered a general property price increase. Additionally, the Fed raised the mortgage rates. For these exact reasons, financing a home in 2023 turned into a tricky undertaking.
Real estate transactions experienced a drop in number worldwide.
The devilish ripple effect didn’t stop there. Selling a home during inflation turned into a chore. Many house hunters and real estate investors postponed investing in assets because they believed the housing market had turned against them.
Due to a shortage of materials, rising inflation, and increasing interest rates, the real estate markets around the world also face the same obstacles. A period of stagnation set in when homeowners don’t rush to sell their properties. At the same time, buyers wait for more affordable home prices and/or better mortgage terms.
How can you tell there is an inflation in process domestically and internationally?
How does inflation affect us? In layperson’s terms, inflation means too much money chasing too few products. The Fed raised the money supply, but you can’t buy the same amount of goods because their production got more expensive.
How does the CPI show the impact of inflation on business?
The Consumer Price Index (CPI) is the most unambiguous indicator to measure inflation in microeconomics. It monitors the average price changes in a representative basket of services and goods purchased by households. If the CPI grows, it means that the prices of those items have risen. According to CNBC, the US CPI increased 0.1 percent in March 2023 and five percent since 2022. However, the good news is that energy and food prices have moderately stabilized.
Based on the CPI, the inflation rate is calculated. The US inflation rate was seven percent in 2021 (the highest value since 1981.) In April 2023, the annual inflation rate decreased to an optimistic 4.9 percent, though it’s high.
Then, the global inflation rate skyrocketed to 8.73 percent. Yet, it shows signs of relief, as it has come down to 6.9 percent by the first quarter of 2023.
The GDP reflects the effects of inflation on economy on a larger scale.
In macroeconomics, production, the amount of money ready in circulation, and expectations (what people think will happen next) influence inflation. The output refers to the gross domestic product or GDP. All three aspects experienced a setback.
After four consecutive economic quarters of negative GDP, a recession kicks in. According to the government’s report (April 2023), the US economy produced an almost insignificant 1.1 percent increase in production. Therefore, we can’t leave our worries about the recession behind yet. On the international level, the GDP couldn’t show outstanding growth either, with only a 2.9 percent increase.
What are the effects of inflation on economy?
We established that inflation happens as the money supply grows, for instance, when central banks create money out of thin air. This is benchmark 101 in a crisis situation meant to finance government actions and expenditures. Yet, in the long run, we can buy less and less for each newly printed bill.
Only those who previously and during the ongoing inflation invested in assets that don’t lose value can keep their heads above the water. While the value of your money grows smaller, the worth of the investment you bought for the loan will increase. Those who keep their savings in physical bills are likely to suffer financially.
Foreign investments are welcome!
Interestingly, one of the consequences of inflation was that the US Dollar started to soar high as opposed to other currencies more exposed to the ongoing war. In July 2022, the USD reached parity with the Euro. We can trace the roots of this “revival” to the Federal Reserve raising interest rates.
The Fed made borrowing money more expensive than the Central European Bank’s weak strategy. Thus, converting foreign currencies into Dollars laid a more stable investment foundation. In other words, the Fed’s measure stimulated foreign investments on American soil.
How does inflation affect us as a society?
Do all these economic and financial hardships impact us in any shape or form? How does inflation affect us in our daily lives? Besides the noticeable effects of inflation on economy, we know that low-income people are exposed the most to the devastating mental and spiritual impact.
Does more money mean an increased sense of self-worth?
To this day, we have no actual data on inflation impact on society. Still, let’s take a couple of familiar scenarios! It’s safe to assume that we depend on our income. Imagine Regular Joe’s anger when he learns that his hard-earned money isn’t worth as much as it once was.
Or, you work for years waiting for a new start, retirement. What is the impact of inflation on senior citizens and their revenue? One of the most jarring consequences of inflation is that older adults find themselves buried under household expenses. Their monthly income sustained a heavy blow with their money’s diminished purchasing power.
People’s self-confidence can also get hurt as they might believe they are worth less. The situation can quickly spiral out of control as frustration leads to anger and anti-social behavior.
Anticipate the adverse effects of inflation on economy and make preparations at home!
Before succumbing to despair, you can take preventive measures and prepare for inflation at home. Why don’t you reduce your overall expenses and budget like a pro?
Invest time and energy in DIY home repairs and revamps to raise your home’s worth. Updating your property with innovative technology will reduce monthly expenses and enhance home security. Moreover, you’ll go into full eco-conscious mode. Any investment in your present home’s renovations will multiply its market value!
The global economy is on a rough ride to recovery.
The International Monetary Fund reported that the worldwide economic recovery will fall from 3.4 percent (2022 data) to 2.8 percent in 2023. In addition, the global baseline inflation of 2022’s 8.7 percent is expected to decrease to seven percent in the case of lower commodity prices in 2023. Yet, the so-called core inflation might subside slowlier. Core inflation describes the rise in goods and services prices without the more volatile food and energy sectors.
The most pragmatic predictions highlight that global inflation won’t reach optimal until 2025. In the meantime, most countries are also indebted, which is another painful impact of inflation on economy. The situation won’t improve shortly due to supply-chain disturbances and geopolitical tensions. Analysts consider foreign direct investments key to the solution.
Final thoughts
What is the impact of inflation on our everyday lives? It’s a vicious circle where the more enormous consequences of inflation influence all aspects of life. The impact of inflation on economy makes our money worth less. Paradoxically, though the money supplies have been raised, its purchasing power dropped.
One of the more transparent effects of inflation on economy is that since the supply of goods drastically decreased, their prices soared. High prices lead to an economic standstill where consumers and investors are literally paralyzed and prevented from purchasing. Unfortunately, the Federal Reserve’s raising interest rate policy might be counter-productive. Making applying for a mortgage loan difficult and won’t revitalize the economy anytime soon.
What does inflation affect? It affects the economy, businesses, people, income, and savings. Speaking of inflation impact on society, it can cause deep psychological scars and public anger.
Globally, the effects of inflation on economy are also substantial. To make things worse, European countries are also exposed to the Russian-Ukrainian war. Raw materials scarcity, increased energy prices, and high-interest rates “add fuel to the flame” and deepen the damaging impact of inflation on economy. Not everything is lost, though. According to predictions, the adverse effects of inflation on economy will stabilize and improve by 2025. Until then, hang on tight there!
How do you cope personally with the impact of inflation on economy? Did the impact of inflation on business affect your revenue? Let your voice be heard on the impact of inflation on your day-to-day life in the comment section below! Also, please press the like button and share this article on social!
