rising prices http://www.wisebread.com/taxonomy/term/8557/all en-US How to Beat Grocery Price Increases http://www.wisebread.com/how-to-beat-grocery-price-increases <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-to-beat-grocery-price-increases" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/wisebread_1.jpg" alt="shopping carts" title="Grocery price increases don&#039;t have to lead to empty shopping carts." class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>If you're on a tight budget, hearing about a rise in gas prices and a rise in grocery prices might give you an identical swell of dread. But the two are actually very different. When gas prices go up, many people have no choice but to pay more. But when grocery prices increase &mdash; as they are expected to in 2013 &mdash; there are lots of strategies you can use to avoid increasing your spending. (See also: <a href="http://www.wisebread.com/how-to-grocery-shop-for-five-on-100-a-week">How to&nbsp;Grocery Shop for Five on $100 a Week</a>)</p> <h2>Stock Up in Advance</h2> <p>Fortunately, looming price spikes are often reported in the news before they hit the stores. It's predicted that <a href="http://www.bestthinking.com/trendingtopics/lifestyle/food_and_cooking/smart-food-shopping-can-offset-drought-driven-price-hikes">this summer's drought will cause the price of certain products to rise by 2013</a>. That gives you plenty of time to stock up on frozen and packaged goods as sales come up throughout this fall. If you've thought about <a href="http://www.wisebread.com/save-enough-on-meat-to-buy-a-chest-freezer">buying a whole side of beef and putting it in deep freeze</a>, now is the time. Some sources even predict that beef prices will fall before they rise, as the higher cost of feed pushes some farmers to slaughter early.</p> <h2>Lock in Prices</h2> <p>If you've been considering joining an organization that delivers produce or meats directly from farms for a set subscription price, sign up now. Some <a href="http://www.wisebread.com/my-csa-experience-farm-fresh-veggies-all-summer-and-possibly-winter">community supported agriculture groups</a> (CSAs) will let you lock in next year's price in advance.</p> <h2>Change Your Eating Habits</h2> <p>The 2013 price spike is expected to affect mainly meat, poultry, dairy, and eggs. We all know we're supposed to be eating more veggies &mdash; now more than ever, following this advice will also be the economical thing to do.</p> <h2>Grab Discounts</h2> <p>Typical annual grocery price increases are around 2.5%. Next year, beef may go up 4-5%, pork 2-3.5%, and chicken and eggs 3-4%, <a href="http://www.usatoday.com/USCP/PNI/Nation/World/2012-07-26-DroughtFood-Prices-725_ST_U.htm">according to the Department of Agriculture</a>. That's not so scary when you consider how easy it is to get a 30-50% discount on meat. One of my favorite tactics is to watch for butcher markdowns on soon-to-expire items. Many stores routinely cut prices on these items by 30-50%, and if you use them the same day or freeze them right away, the quality is fine. Other stores frequently offer buy one, get one free deals on meat, effectively giving you a 50% discount. Both kinds of sale completely eclipse a 5% or even 15% price spike.</p> <h2>Believe in the Budget</h2> <p>You'll find yourself a lot more motivated to avoid increasing your spending if you have a firm number in mind. No matter which strategy you choose from above, you'll have a better chance at success if you <a href="http://www.wisebread.com/10-things-ive-learned-from-grocery-shopping-on-a-budget">know what number you're aiming for each week</a>.</p> <p>Wise Bread has lots of advice on saving on groceries, and whatever strategies you use, the results tend to be much larger than the expected price spikes. Check out these other posts for inspiration:</p> <ul> <li><a href="http://www.wisebread.com/save-on-groceries-with-discount-grocery-stores">Save on Groceries With Discount Grocery Stores</a>. Switching grocery stores is a quick and easy way to cut up to 50% from your bill.<br /> &nbsp;</li> <li><a href="http://www.wisebread.com/save-money-on-groceries-with-these-online-tools">Save Money on Groceries With These Online Tools</a>. How to plan menus, find coupons, and compare prices online.<br /> &nbsp;</li> <li><a href="http://www.wisebread.com/meat-money-grocery-saving-tips-for-carnivores">Meat Money: Grocery Saving Tips for Carnivores</a>. This piece talks about cooking techniques that spread your meat thinner, even mixing it with textured vegetable protein to stretch it.<br /> &nbsp;</li> <li><a href="http://www.wisebread.com/waste-not-want-not-stop-throwing-away-your-food">Waste Not, Want Not: Stop Throwing Away Your Food!</a>&nbsp;A surprising list of vegetable &quot;leftovers&quot; that can be eaten instead of thrown away.</li> </ul> <p>&nbsp;</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/carrie-kirby">Carrie Kirby</a> of <a href="http://www.wisebread.com/how-to-beat-grocery-price-increases">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-best-and-worst-times-to-go-grocery-shopping">The Best and Worst Times to Go Grocery Shopping</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-meaning-of-milk-label-colors">The Meaning of Milk Label Colors</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-only-15-foods-that-are-worth-buying-organic">The Only 15 Foods That Are Worth Buying Organic</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-6-healthiest-grocery-stores">The 6 Healthiest Grocery Stores</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/11-ways-to-shop-for-food-cheaply-without-a-tedious-grocery-list">Grocery Shopping for the Cheap and Lazy</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Food and Drink grocery price increases grocery shopping rising prices Mon, 13 Aug 2012 10:24:41 +0000 Carrie Kirby 948716 at http://www.wisebread.com Why Inflation Isn't as Bad as You Think http://www.wisebread.com/why-inflation-isnt-as-bad-as-you-think <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-inflation-isnt-as-bad-as-you-think" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/balloons.jpg" alt="Woman holding balloons" title="Woman holding balloons" class="imagecache imagecache-250w" width="250" height="137" /></a> </div> </div> </div> <p>When talking to baby boomers, it's not uncommon for the discussion to move to how much cheaper things were back in the day. &quot;Coke was just a nickel! Hamburgers were selling for 10 cents!&quot; The natural progression in the conversation, of course, will lead to inflation and how destructive it could be to our retirement plans.</p> <p>Yet, inflation isn't nearly as bad as most people think it is. Here are five reasons why inflation won't be as devastating to your retirement savings as you might think. (See also:&nbsp;<a href="http://www.wisebread.com/how-to-live-with-inflation">How to Live With&nbsp;Inflation</a>)</p> <h3>1. A Significant Portion of Your Financial Assets Are Actually Inflation Adjusted</h3> <p>You can flat out invest in TIPS, but even stocks will keep up with inflation in the long term. This is because while inflation initially affects a company's bottom line through cost increases, the company will eventually pass that onto consumers by raising prices.</p> <p>Your house is another asset that keeps up with inflation fairly well. This is due primarily to rent and wage increases, which will both push up home prices in the long run.</p> <h3>2. Sometimes Inflation Can Work in Your Favor</h3> <p>Tax brackets, for example, are inflation adjusted so that you need a higher income to be taxed at the higher rates. In other words, you will eventually have a smaller tax bill through time unless your income actually increases. Retirement fund contribution limits also increase with inflation, which means that you can put more away for your future without Uncle Sam grabbing a share first. The maximum limit you can put in a 401(k) increased by $500 in 2012 due to inflation, allowing you to defer taxes for a larger amount.</p> <h3>3. Inflation Probably Isn't Even Why You're Spending More</h3> <p>You are likely spending more because you inflated your lifestyle. Instead of a landline, you got a cell phone, and eventually a smart phone with that extra data plan. You used to eat ramen, but you've upgraded to that Fettuccine Alfredo at a fine restaurant. You used to clean with a reusable cloth, but you are using sanitized wipes.</p> <p>It's not limited to upgrading your life either. When you weren't making as much money, you might've gone out of your way to switch your cable TV provider every few months to take advantage of the broadband promotions companies offered. But do you still do this?</p> <p>The good news is this is that there are likely alternatives you can find to cut costs if you truly have to do so. And since you already know you can live happily without the recent luxuries, you can rest knowing that you will be fine.</p> <h3>4. Some Things Are Actually Less Expensive Than Before</h3> <p>Not everything always goes up in price. Technology, for example, seems to have a downward trend. And I know this is bad for me, but I've loved the McChicken sandwich ever since I was a little kid. On the occasional trip to the <a href="http://www.wisebread.com/fast-food-slow-food-and-your-dollars-at-work">fast food</a> joint, I'm now paying $1 for each sandwich as opposed to $2.50 in the 90s.</p> <h3>5. A Significant Portion of Your Expenses Can Be Fixed</h3> <p>The monthly <a href="http://www.wisebread.com/6-great-reasons-for-paying-off-the-mortgage-on-your-home">mortgage payment</a> is a pretty big expense for most households, but you can choose to fix this cost for 30 years by applying for a 30-year fixed mortgage. You never know &mdash; inflation may get so out of control that all you have to do to satisfy your monthly mortgage payment in a few decades is skip buying a few cases of Coke a month.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/david-ning">David Ning</a> of <a href="http://www.wisebread.com/why-inflation-isnt-as-bad-as-you-think">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-4"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-live-with-inflation">How to live with inflation</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/more-than-just-inflation">More than just inflation</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/can-a-little-inflation-be-good">Can a Little Inflation Be Good?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/all-about-deflation">All About Deflation</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-things-your-boomer-parents-could-afford-that-you-cant">8 Things Your Boomer Parents Could Afford That You Can&#039;t</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance inflation mortgages rising prices Mon, 09 Jan 2012 11:24:21 +0000 David Ning 854222 at http://www.wisebread.com How Natural Disasters Can Change Pricing Worldwide http://www.wisebread.com/how-natural-disasters-can-change-pricing-worldwide <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-natural-disasters-can-change-pricing-worldwide" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/post-tsunami.jpg" alt="Recovery workers after a tsumani" title="Recovery workers after a tsumani" class="imagecache imagecache-250w" width="250" height="134" /></a> </div> </div> </div> <p>Millions of natural disasters occur around the world each year, from volcanic eruptions to wildfires to tsunami. As implied by the term &ldquo;disaster,&rdquo; these events can have devastating effects on human life, local economies, and the environment itself. Historically, natural disasters have caused a lot of damage to pricing schemes, as we can see from the following. (See also: <a href="http://www.wisebread.com/party-like-its-1999-the-psychology-of-pricing">The Psychology of Pricing</a>)</p> <h2>Earthquakes and Tsunami</h2> <p>With the United States&rsquo; Geological Survey&rsquo;s most recent <a href="http://earthquake.usgs.gov/earthquakes/eqarchives/year/eqstats.php">report on earthquakes</a> stating that its National Earthquake Information Centers are detecting up to fifty earthquakes per day (approximately 20,000 per year) and millions more are suspected to occur without detection, it&rsquo;s not surprising to see how earthquakes create not only tremors in the ground, but also in pricing for various goods in the market.</p> <p>Case in point &mdash; the devastating 9.0 earthquake off the coast of Japan that occurred on March 11, 2011. As one of the biggest exporters of technological products in the world, companies based in Japan faced a harrowing situation with the subsequent blackouts and parts shortages correlated to the earthquake and tsunami that struck the region. <a href="http://techland.time.com/2011/03/15/japan-earthquake-tech-supply-shortages/">TIME Magazine</a> reported that items such as televisions, PCs, and phones were (and still are) likely to see a rise in prices following the catastrophe. With factories shut down or wiped out altogether, the streamlined creation process for these technologies experienced a severe disruption in wake of these events, and we can see from historical evidence that this isn&rsquo;t the last time an earthquake will lead to a spike in prices due to industrial interruptions.</p> <h2>Global Warming</h2> <p>We&rsquo;ve been hearing about this one for years. From Al Gore&rsquo;s <em>An Inconvenient Truth</em> to the Kyoto Protocol (from which Canada recently withdrew and the United States has yet to ratify), global warming seems to be a major threat posed to our world today. While there are mixed views on the causes and even the very existence of this climate change, one thing is for sure &mdash; the regulations placed on corporations could potentially send prices soaring. This isn&rsquo;t to say these policies are not beneficial &mdash; the debate over whether we should protect the environment or the economy first and foremost will never cease &mdash; but when the operating costs for these companies rise as a result, they are more inclined to pass these costs along to consumers.</p> <p>As a 2009 Forbes article on the <a href="http://www.forbes.com/2009/06/08/waxman-markey-bill-carbon-emission-opinions-contributors-cap-and-trade.html">Cap and Trade Bill</a> stated, politicians in countries across the globe are enacting legislative measures that would require corporations to buy emissions permits for every ton of CO2 generated. While this is a great step towards cleaner, more efficient energy usage, it could also further damage the economy by sending energy prices upward, thus hurting consumers. Regardless of the &ldquo;correct&rdquo; view on the existence and severity of global warming, one thing is for certain &mdash; this will continue to affect price levels for years to come.</p> <h2>Drought</h2> <p>Have you ever read John Steinbeck&rsquo;s <em>The Grapes of Wrath</em>? The Dust Bowl of the 1930s &mdash; during which the story takes place &mdash; was more than just fiction. The droughts and unusually high temperatures during the Great Depression negatively affected thousands of farmers and people who couldn&rsquo;t afford the food prices when the supply diminished, and we continue to see these problems persisting to this very day. The Horn of Africa is currently experiencing its <a href="http://www.un.org/apps/news/story.asp?NewsID=39271">worst drought in nearly six decades</a>. Food prices are only making the problem worse for the millions of people in the region, as even staple items such as maize and milk are on the rise. Anyone who has taken an Economics 101 class knows that supply has an inverse relationship with the price of goods, so with less and less food being grown each year, the famine continues to worsen for those who can&rsquo;t afford the surge in <a href="http://www.wisebread.com/how-to-grocery-shop-for-five-on-100-a-week">prices for food</a>.</p> <h2>Torrential Rains</h2> <p>Contrary to a severe dry season, torrential rains can also lead to a terrible supply shock, as seen in the current Norwegian butter crisis. After an uncommonly wet summer season in Norway, the quality of grazing land for the cows diminished, leading to a sharp drop in the availability of this basic dairy good. As with the rest of the supply shortages as seen in other natural disasters listed above, prices have increased for Norwegians who have been waiting weeks for butter imports.</p> <p>Torrential rains can also cause flooding, which generally devalues homes in the area and shuts down <a href="http://www.wisebread.com/choosing-local-businesses">local businesses</a>, economically hurting both the owners and customers in the region.</p> <p>With the Earth&rsquo;s carrying capacity being stretched to its limits, we are bound to see more natural disasters occurring in the future. With natural disasters comes a loss of life, as well as potentially destructive impacts on pricing in countries around the world. Our governments do what they can to alleviate the hazards before a disaster strikes, but the funding and technology in the status quo isn&rsquo;t enough to prevent them from happening. Ultimately, only our mitigation efforts can be the keys to softening the blow when these catastrophes strike.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/kelly-kehoe">Kelly Kehoe</a> of <a href="http://www.wisebread.com/how-natural-disasters-can-change-pricing-worldwide">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/can-a-little-inflation-be-good">Can a Little Inflation Be Good?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/save-more-by-avoiding-multiple-bank-accounts">Save More by Avoiding Multiple Bank Accounts</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/energy-price-spikes">Energy Price Spikes</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/12-everyday-money-tasks-youve-been-doing-wrong">12 Everyday Money Tasks You&#039;ve Been Doing Wrong</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-clever-ways-to-sample-the-good-life">8 Clever Ways to Sample the Good Life</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Budgeting Financial News natural disasters rising prices supply and demand Fri, 06 Jan 2012 10:48:18 +0000 Kelly Kehoe 843450 at http://www.wisebread.com Energy Price Spikes http://www.wisebread.com/energy-price-spikes <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/energy-price-spikes" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/gas-station-3.jpg" alt="Expensive fuel" title="Expensive Fuel" class="imagecache imagecache-250w" width="250" height="161" /></a> </div> </div> </div> <p>The current price spike hasn't gotten energy prices as high as they were in mid-2008, but they're already higher than any other time, and they're still going up.</p> <p>This trend will continue. I don't mean that prices will keep going up right now (although they may). What I mean is that energy prices will continue to rise and fall. If your current living arrangements are such that sharp spikes in energy prices put your household finances at risk, you need to change your living arrangements.</p> <p>Energy prices over the past few years (from the month before Katrina hit New Orleans through last month) looked like this:</p> <p><img width="500" height="308" src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u203/energy-prices-katrina-2011.png" alt="" /></p> <p>Expect more of the same.</p> <h2>No Surprise</h2> <p>I've written about this before, starting with <a href="http://www.wisebread.com/plan-for-expensive-fuel ">Plan for Expensive Fuel</a>, written in 2007 just two weeks after I started writing for Wise Bread, and then again during the mid-2008 price spike in <a href="http://www.wisebread.com/what-if-energy-costs-keep-rising ">What If Energy Costs Keep Rising</a>.</p> <p>Whenever prices went down, I'd write to suggest that you take advantage of the lower prices to <a href="http://www.wisebread.com/fix-energy-in-tangible-form ">Fix Energy in Tangible Form</a>.</p> <p>My point is, the current price spike is not a surprise. Nor should it be a surprise when oil prices fall again in the future. Volatile prices are exactly what we can expect.</p> <p>(I've also written any number of more narrowly focused energy pieces. See <a href="http://www.wisebread.com/rural-living-in-a-world-with-expensive-fuel">Rural Living in a World with Expensive Fuel</a> and <a href="http://www.wisebread.com/better-cars-are-not-the-answer">Better Cars Are Not the Answer</a>.)</p> <h2>Why This Happens</h2> <p>We see this behavior of spikes and drops because of the nature of energy industries and the energy markets.</p> <p>First, demand for energy is elastic, but only in the medium term. In the short term &mdash; over the next few months &mdash; people will pay whatever it costs to get the fuel they need to keep their pipes from freezing, to keep their ice boxes from thawing, and to keep getting to work every day. Over periods of a year or two, however, people can and do make the necessary structural changes to adapt to high prices. They'll buy more fuel efficient cars. They'll buy energy star appliances. They'll insulate their houses.</p> <p>Once they make those changes, they tend to stick with them. If fuel prices drop after you've moved close to the office, you might ease up on your plan to walk to work every day, but you're not going to start driving out to where you used to live just because fuel is cheap. Nobody rips out their insulation or digs their old furnace out of the dump just because energy prices fall.</p> <p>Second, supply is inelastic in the medium term. You're only going to drill an oil well if market conditions make you think you'll make a good profit. But once you've got a well pumping, even if profits disappoint you're going to go on producing.</p> <p>When prices are high for a sustained period, consumers make permanent changes in their use of fuel. At the same time, producers make long-term investments in production capacity &mdash; capacity that will be used, even if prices fall.</p> <p>Finally, much of the energy market isn't a market. Oil-producing countries often supply fuel to their citizens at below-market prices. They also make non-market deals with oil-importing countries for political rather than financial considerations. That means that market pressures can have very odd effects.</p> <p>In a pure market economy, there really isn't any such thing as a shortage, there's just a market-clearing price. But in non-markets like the oil market, you can have gasoline selling for $1 in Venezuela at the same time that service stations in the US offering $5 a gallon can't get their tanks filled. Throw in subsidies and regulation, and the result is a market that falls well short of being a textbook free market.</p> <p>These factors, taken together, mean that we simply have to expect large swings in the price of fuel.</p> <h2>What to Do</h2> <p>I've always thought that the winning strategy was clear: Arrange your life so that you can get by on <a href="http://www.wisebread.com/the-good-life-on-less-energy-even-in-the-us">much less fuel</a> than the average person &mdash; then take advantage of periods of cheap fuel to make <a href="http://www.wisebread.com/invest-some-of-this-cheap-energy">permanent investments in your well-being</a>.</p> <p>There are a thousand things you can do to make yourself less dependent on fuel. Some cost a lot of money (buying a fuel-efficient car, installing a wind or solar power system). Some cost just a little money (installing weather stripping). Some save you money (turning down your heat in the winter, <a href="http://www.wisebread.com/turn-off-your-air-conditioning">leaving your air conditioning off</a> in the summer).</p> <p>With many, the issue isn't that the accommodations are particularly expensive, but that they require a long lead time.</p> <p>A particularly important example of that last one: Move or change jobs (or both) such that you can get to work without needing to drive. It might take a year for your lease to expire, it make take several years for property prices to recover so that you could sell your house, or it might take going back to college to get a degree that would let you find a better job. But arranging your life so that you can earn a living even when fuel prices are high is very important.</p> <p>As far as taking advantage when prices are low, the field is pretty much wide open there as well. I've taken a couple of trips to Europe when oil prices were low and plane tickets were cheap. I bought a <a href="http://www.wisebread.com/save-time-money-energy-and-eat-great">pressure cooker</a>. If I owned land, I'd have dug a pond for fish and gotten all my ditches and berms the way I wanted them.</p> <p>The main point is simply this: Energy prices will rise and fall. Get used to it. Arrange your life so that you can take advantage of the lows instead of suffering during the highs.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/energy-price-spikes">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/book-review-confronting-collapse">Book Review: Confronting Collapse</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/19-tips-to-cut-costs-by-using-your-oven-efficiently">19 Tips to Cut Costs by Using Your Oven Efficiently</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/can-a-little-inflation-be-good">Can a Little Inflation Be Good?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-natural-disasters-can-change-pricing-worldwide">How Natural Disasters Can Change Pricing Worldwide</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/trade-versus-localization">Trade versus localization</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Financial News Green Living cut energy costs green homes rising prices Thu, 28 Apr 2011 10:36:24 +0000 Philip Brewer 532480 at http://www.wisebread.com Can a Little Inflation Be Good? http://www.wisebread.com/can-a-little-inflation-be-good <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/can-a-little-inflation-be-good" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/baloon-inflation-3_0.jpg" alt="Balloon Inflation" title="Balloon Inflation" class="imagecache imagecache-250w" width="250" height="277" /></a> </div> </div> </div> <p>Let me jump to the end and say right at the start that I don't think so. However, there's a serious argument being made right now among economists and economic policy makers that higher inflation would be good. There's enough of them in the pro-inflation camp that it's worth taking a look at what they're saying.</p> <p>The Economist has a good article summarizing the current economic thinking that <a href="http://www.economist.com/blogs/freeexchange/2010/02/monetary_policy_1">very low inflation can lead to trouble</a>.</p> <p>The basic case of the pro-inflation camp is that certain kinds of economic adjustments are very hard to make under a condition of stable prices. The classic example is wages, which are (in the term economists use) &quot;sticky on the downside.&quot; That is to say that workers will resist wage cuts very strongly &mdash; strongly enough that employers find it easier to cut jobs than to cut wages.</p> <p>When an economic downturn hits during a period of very low inflation, it's hard to adjust. Output goes down, jobs are lost, businesses go bust, asset prices fall, etc. (In other words, exactly what we're seeing right now.)</p> <p>When there's a little inflation, it's possible to make much the same adjustments with less loss in output. Instead of trying to cut wages, employers can achieve the same result simply by giving raises lower than inflation. That means that fewer jobs are lost, fewer businesses go broke, asset prices don't have to fall as far, and so on. Economists like to speak of a little inflation as a &quot;lubricant&quot; in the adjustment process.</p> <p>In addition to making the adjustment smoother (all wages and prices go up, but some go up slower than inflation, which amounts to a cut), a little inflation can stimulate the economy, by prompting people to buy now before prices go up (i.e. before the value of their money falls even further).</p> <p>I've talked before about the <a href="http://www.wisebread.com/inflation-is-worse-than-you-think ">downsides of inflation</a>. When prices are stable over the long term, people can focus more of their attention on productive activities and less on <a href="http://www.wisebread.com/debasing-not-just-the-currency">keeping track of price changes</a>.</p> <p>Worse, though, I think higher inflation rates are inherently unstable. An inflation rate under 2% is low enough that inflation can just about be ignored, and a consensus can develop that it's okay. A higher inflation rate, though, becomes noticeable &mdash; and there will be pressure to change the inflation rate. Whether the pressure to raise the inflation rate will win over the pressure to lower the inflation rate can't be known, so everyone has to keep their plans flexible so that they can adjust to either possibility. That makes it much tougher to make long term plans &mdash; and that, I think, costs our economy quite a bit.</p> <p>Maybe my thinking is overly influenced by my own experience &mdash; I was setting up my first household in 1980-1981, right at the peak of the 1970s inflation. But I don't think inflation is ever a better answer than stable prices.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/can-a-little-inflation-be-good">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/more-than-just-inflation">More than just inflation</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-live-with-inflation">How to live with inflation</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-ive-been-trying-to-say">What I&#039;ve been trying to say</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/peak-debt">Peak Debt</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-inflation-isnt-as-bad-as-you-think">Why Inflation Isn&#039;t as Bad as You Think</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Financial News economics economist inflation prices rising prices Wed, 17 Feb 2010 14:00:05 +0000 Philip Brewer 5307 at http://www.wisebread.com Sticky prices http://www.wisebread.com/sticky-prices <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/sticky-prices" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/bubblegum.jpg" alt="Bubblegum" title="Bubblegum" class="imagecache imagecache-250w" width="250" height="214" /></a> </div> </div> </div> <p>I&#39;m old enough to remember when a piece of bubble gum was a penny.  In fact, it was a penny for most of my youth--and had been a penny for a couple decades before I was born.  As inflation began to heat up in the 1960s, though, the Topps company first shrank the size of a piece of gum, and then eventually had to raise the price.</p> <p>I talked last week about the costs everyone faces trying to deal with unpredictable price increases and <a href="/debasing-not-just-the-currency">changing product sizes</a>.  This post is about some special cases.</p> <h2>Uncertainty cuts sales</h2> <p>One problem that businesses face is that customer uncertainty means some business is completely lost:  A customer who has $10 in his pocket might decide not to eat at a restaurant that had charged $9-something last week, simply out of fear that the cost had gone up.  Bad enough if the price had, in fact, gone up--but even worse if the price was still the same, but the customer didn&#39;t want to take the chance.</p> <p>Businesses try various things to fight this.  One is simply to advertise prices as a way to reduce uncertainty.  Since it&#39;s hard to remember whole price lists, companies start giving whole categories of items a consistent price--creating &quot;dollar menus,&quot; selling $5 foot-long subs, and so on.</p> <p>The downside of advertising prices--and of making them easier to remember--is that it makes the prices harder to change.  It&#39;s one thing if you raise the price of your hamburgers from 87 to 89 cents.  It&#39;s an altogether different thing to charge $1.02 for the stuff on your dollar menu.  The result is sticky prices--prices that are hard to change.</p> <h2>Sticky prices</h2> <p>That was the problem Topps had with it&#39;s one-cent bubble gum.  Their only choices were to hold the line or to double the price.  It&#39;s a cruel irony that the exact same inflation that pressures companies to advertise their prices to reduce the losses caused by price uncertainty, turns right around to punish them again once they do so, because advertising makes their prices sticky--making it all the harder for the seller to make the small price increases that let them stay even with inflation.</p> <p>Another example would be the newspaper.  The way they&#39;re sold--in machines that don&#39;t give change and at newsstands where you put down your money, grab a paper, and go--makes it convenient for people to pay an even amount.  My local paper costs 50 cents, and it&#39;s just not practical for the newspaper to push the price up to the 53 or 54 cents that would bring them even with recent inflation.  They probably won&#39;t even raise the price to 60 cents, although they could.  I bet they&#39;ll hold the line as best they can until they simply have to make a change, and then they&#39;ll go up to 75 cents.</p> <p>In general, I expect we&#39;ll see much the same from the dollar menu.  Over the next few months we&#39;ll see all the same little tricks--servings will get smaller, and items with expensive ingredients will drop off the dollar menu.  Pretty soon they&#39;ll quit advertising the dollar menu (making up some new alternative: &quot;$4 feasts&quot; perhaps).  Once a minimally decent interval has passed, the dollar menu will be gone.</p> <p>Someday, we will once again have a currency that holds its value.  Then both prices and package sizes will be stable.  I&#39;m ready.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/sticky-prices">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/can-a-little-inflation-be-good">Can a Little Inflation Be Good?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/are-most-businesses-just-going-green-to-save-some-green">Are Most Businesses Going Green Just to Save Some Green?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/more-than-just-inflation">More than just inflation</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-strange-ways-online-shopping-has-changed-the-world">6 Strange Ways Online Shopping Has Changed the World</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-ways-retailers-use-big-data-to-track-you">8 Ways Retailers Use Big Data to Track You</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Consumer Affairs bubblegum dollar menu prices rising prices Wed, 28 May 2008 11:45:28 +0000 Philip Brewer 2125 at http://www.wisebread.com More than just inflation http://www.wisebread.com/more-than-just-inflation <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/more-than-just-inflation" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/alley.jpg" alt="" title="" class="imagecache imagecache-250w" width="250" height="181" /></a> </div> </div> </div> <p>With prices up, price statistics that look preposterous to anyone who shops, and the Fed trying to thread the needle of preventing a recession without letting inflation run out of control, I want to make sure everyone knows that we&#39;re seeing at least two other issues besides inflation.</p> <p>Inflation is when the <strong>money becomes less valuable</strong>. The visible result is higher prices, but it&#39;s important to remember that the higher prices are the result, not the thing itself. In general, inflation is happening all the time--sometimes faster, sometimes slower--but it&#39;s worth keeping in mind that there are other processes that affect prices, because the best strategies are different in different situations.</p> <h2>Changes in relative prices</h2> <p>One other thing that can look like inflation (but isn&#39;t) is changes in relative prices. Relative prices change all the time, of course: the price of text messages goes up, the price of milk goes up more, the price of flash memory cards goes down. Sometimes you get into a situation where the prices of things that everyone buys (food, fuel) go up, while the prices of things that most people don&#39;t notice go down. For example, the price of wool just lately has been so low that (except for certain specialty types) it&#39;s not even worth the trouble of marketing it, even for farmers who raise lambs for meat and have to shear their sheep anyway.</p> <p>Relative prices change for many different reasons. Tastes change, leading to higher prices for whatever the hot, new thing is. There are seasonal changes in relative prices both because of what&#39;s available and what people want to buy. The weather affects relative prices (seasonal weather, but also short-term changes like a hot day and long-term changes like global warming). Changes in technology are a huge factor in relative prices. Not only technological improvements driving the prices of high-tech goods relentlessly downward, but also new, cheap high-tech goods replacing old expensive alternatives (such as plastic buckets replacing galvanized metal ones).</p> <h2>Changes in standard of living</h2> <p>Sometimes price levels just go down as people overall get wealthier. That&#39;s been the dominant trend of the past three hundred years or so. The combination of cheap energy (coal and steam engines at the beginning of the industrial revolution, oil and internal combustion over the past hundred years or so), globalization (letting goods, labor, and capital move to wherever it could be most profitably employed), economic liberalization (letting markets work), and technology have simply made people vastly more wealthy than ever before.</p> <p>Other times prices levels just go up as people overall get poorer. That has always happened for brief periods--when drought or war destroyed the capacity of people to produce the necessities of life, and when bad government or a lack of government made it impossible for productive people to prosper.</p> <p>Over the past few hundred years, declines in the standard of living have generally been temporary--often even brief--but that&#39;s just happenstance and not a law of nature. Two of the great engines of prosperity (cheap energy and globalization) may be just about played out. That could well mean stable or even falling standards of living, and not the continual increases that we&#39;ve all grown used to. </p> <h2>Different things, different strategies</h2> <p>All three of these things are going on all the time, but the strategies for dealing with the them are different, so it&#39;s worth thinking about which ones are dominant at any particular time.</p> <p>I wrote a couple days ago on <a href="/how-to-live-with-inflation">How to live with inflation</a>, which is actually the easiest to deal with, because inflation doesn&#39;t really change prices, it just changes what they&#39;re called. That is, the price of something was called $1.00 last year and this year it&#39;s called $1.10, but the real cost (in terms of hours worked or what other items you could exchange it for) is about the same--wages, salaries, and other prices have all gone up by a similar amount, so you&#39;re really in about the same situation you were in before. Each individual circumstance is different, so some people will fare better and others worse, but as long as you&#39;re aware of the situation and adapt to the changes, you can live with inflation okay.</p> <h2>Dealing with changes in relative prices</h2> <p>Changes in relative prices can be good, of course, if the prices of things that you buy go down relative to prices of things you don&#39;t buy. (People generally don&#39;t even notice when that happens, which is why changes in relative prices are so easily confused with inflation.)</p> <p>For adverse changes in relative prices, though, there are really only two answers. You can adapt by changing your spending choices to buy less of the more-expensive stuff and more of the less-expensive stuff. Or, you can let your standard of living fall.</p> <p>Everybody does both of these things all the time anyway--you go to the store to buy a roasting chicken, find that the fryer are on sale, and just buy a big fryer and roast that instead. Of course, a frying chicken is a pretty good substitute for a roasting chicken. Often there isn&#39;t such a good substitute: Beef gets more expensive so you buy chicken. Chicken and pork get more expensive so you buy lentils. Lentils get more expensive so you buy less. Making do with less is lowering your standard of living. Buying something that you don&#39;t like as much is also lowering your standard of living, although perhaps not by as much.</p> <p>In cases where there simply is no good substitute (whether in an absolute sense, or just because of your family&#39;s preferences), changes in relative prices amount to the same things as a reduced standard of living.</p> <h2>Dealing with changes in standard of living</h2> <p>Putting aside reducing saving and taking on debt (which let you live at a higher of standard of living now, but at the cost of a lower standard of living later), the only answer to a drop in your standard of living is . . . to lower your standard of living. This is true regardless of whether the cause is a change in relative prices or a drop in standard of living across the board.</p> <p>For example, let&#39;s say that oil prices go up. At first, this leads to a change in relative prices--gasoline and fuel oil prices rise.</p> <p>People with a choice don&#39;t just take that lying down, of course. They switch to cheaper fuels. The guy who heats with fuel oil but also has a wood-burning stove will track down some wood to burn. A company might cut a production line at a factory that uses fuel oil while another factory that uses natural gas might add a second shift. The result of these actions is to raise the price of substitutes.</p> <p>Whether they&#39;re paying more for oil, gasoline, wood, or natural gas, companies are all going to try to pass these costs on to their customers. They&#39;ll also try to hold the line on other costs (such as wages). To the extent that they can&#39;t manage either of those things, they&#39;ll end up producing reduced profits for the owners. These changes ripple through the whole economy, making everybody less well off--a decline in the standard of living.</p> <p>The key to dealing with a decline in the standard of living is <strong>not to confuse it with inflation</strong>. If what&#39;s going on is inflation, you can just go on living much as you had been, with some confidence that wages, salaries, and investment returns will all adjust to make things come out even. If you try that strategy when standards of living are declining, you find your savings dropping, your debt rising, and your job unexpectedly at risk. Don&#39;t do that.</p> <p>It&#39;s always hard to tell the difference among these things at the time; it only becomes clear after the fact. Fortunately, you can keep yourself on the right track by making the most cautious choices. If prices go up, look for alternatives. When there are no alternatives, buy less. Look for choices outside the money economy, or at least around the edges--grow vegetables in your own garden, make friends with your neighbors who have gardens, join a local food co-op, sign up with local Community Supported Agriculture, learn about wild foods that grow in your region and start to use them. Keep your saving on track and avoid taking on more debt.</p> <p>To the extent that what&#39;s going on is just inflation and changes in relative prices, these choices may result in an unnecessary drop in your standard of living, because wages, salary, and investment returns will end up balancing the rise in prices. But, if what you&#39;re seeing is a drop in standard of living, then these are the choices that protect your family. If it&#39;s just inflation, then you&#39;re ahead of the game--a bit more money to save and invest. If it&#39;s not, then you&#39;re in much better shape than people who just assumed that everything would be fine.</p> <p>There are worse things out there than inflation. Be ready to deal with them.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/more-than-just-inflation">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-4"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-live-with-inflation">How to live with inflation</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/can-a-little-inflation-be-good">Can a Little Inflation Be Good?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/stag-hyperinflation">Stag-hyperinflation?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/inflation-is-going-away-for-a-while">Inflation is going away for a while</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/preparing-for-a-recession">Preparing for a Recession</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance depression inflation prices recession relative prices rising prices Sun, 20 Jan 2008 15:16:35 +0000 Philip Brewer 1653 at http://www.wisebread.com How to live with inflation http://www.wisebread.com/how-to-live-with-inflation <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-to-live-with-inflation" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/balloon-inflation_1.jpg" alt="Balloon inflating" title="Balloon Inflating" class="imagecache imagecache-250w" width="250" height="227" /></a> </div> </div> </div> <p>Of the various ills the economy can face, inflation is simultaneously the worst for society as a whole, and yet the easiest for individuals to deal with successfully. The strategies for dealing with inflation are pretty straightforward. </p> <p>In theory, inflation shouldn&#39;t matter at all, as long as it is predictable. If you know that inflation is going to be 10% next year, you demand a 10% raise (and your boss gives it to you, because he knows that 10% inflation means that the raise doesn&#39;t cost him anything). Everybody else does the same and prices, wages, interest rates, stock market returns, etc. are all 10% higher, even though in real terms everyone is standing still.</p> <p>In practice, of course, it isn&#39;t so simple:</p> <ul> <li>Just because you demand a raise that matches inflation doesn&#39;t mean you&#39;ll get it.</li> <li>When inflation is bad, prices go up every month (maybe every week), but wages and salaries generally only go up once a year. People are always feeling like they&#39;re playing catch up.</li> <li>Inflation is never really predictable. Everybody has their own guess about what inflation will be, and most of them will be wrong. Whether your estimate is high or low, you&#39;ll have problems to the extent that you&#39;re wrong. Even if you&#39;re wrong in a good way, such as having negotiated a 10% raise when inflation turned out to only be 8%, you&#39;re still in trouble (maybe your company has to lay you off).</li> <li>Taxes are imposed on nominal returns, so you can find yourself in the perverse situation of losing money in real terms, and yet still paying taxes on supposed profits.</li> </ul> <p>For individuals, the strategies for dealing with inflation are:</p> <ol> <li>Be careful about holding cash. This is a big change for people who have come of age since 1981 or so--since then, holding cash has been a perfectly reasonable thing to do. People whose saving and investing experience includes the 1970s, though, remember having a bank account that was earning 5% interest rates that was nevertheless worth 5% <strong>less</strong> at the end of the year.</li> <li>Don&#39;t make long-term, fixed rate loans. Until the inflationary period is over, don&#39;t buy bonds. High inflation rates completely destroy the value of long-term bonds. The flip side of this is that borrowing money on a long-term, fixed rate basis (such as a mortgage) can make good sense, if you can get good rate. There are a lot of people who bought a house with a 30-year mortgage at a fixed 6% or 7% and held as rates went up to 14% or higher. They made out like bandits.</li> <li>Invest in &quot;stuff&quot; rather than in money. This can be gold (although I&#39;d hesitate to establish a position at these prices). Even better is <a href="/huge-tax-free-investment-returns">stuff that you&#39;re going to use anyway</a>. If you&#39;re going to use it anyway, and you can get it at a good price now, it makes a great deal of sense to buy stuff now, rather than save cash and then buy it later.</li> <li>Invest for long-term capital gains. Inflation tends to produce illusory profits: you look like you&#39;re making a profit even when you&#39;re just keeping up with (or even failing to keep up with) inflation--and you have to pay taxes on those profits. This makes investing for income (where a large fraction of the income is really just keeping you even with inflation) a bad deal. It also makes short-term capital gains a bad deal for much the same reason--you have a big (taxable) gain, even if in reality you&#39;re just breaking even. Investing for long-term capital gains helps with these issues.</li> <li>Use barter and the informal economy. If your neighbor hires you to help him create a website and you hire him to help you cut down a diseased tree next to your driveway, you both owe income taxes on whatever you&#39;re paid. If you instead swap these services informally, you <strong>still</strong> owe the taxes, but you&#39;re expected to declare the income at its fair market value. It&#39;s perfectly reasonable, though, to declare the income at what the service would have been worth the previous year.</li> </ol> <p>For businesses, the strategies are similar, except that it&#39;s possible to greatly expand on that last point--use barter and the informal economy--by vertically integrating the company so that the steps of producing your product are all internal transfers rather than cash transactions with another company.</p> <p>If company A produces raw materials, company B refines them, company C builds sub-assemblies, company D makes consumer goods, company E ships them, company F wholesales them, and company G sells them to consumers at retail, imagine what happens as inflation forces prices up at each step along the way--producing illusory profits that each company has to pay taxes on. On the other hand, if <strong>one company</strong> handles the entire production chain, the only cash transactions are things like salaries and rents--that can be fixed for a year at a time. All the other transactions can be dealt with as an internal accounting matter, with no taxes due.</p> <p>In addition to vertically integrating, it also makes sense for businesses to reverse the trend toward outsourcing--instead of paying someone else to haul the trash away (a taxable transaction), haul your own trash away (an internal transfer that doesn&#39;t incur any taxes). Likewise, in-source anything you can--accounting, legal, maintenance, facilities, etc.</p> <h2>Damage to the economy</h2> <p>Inflation works its harm on the economy in several different ways. None of them are really due to the inflation itself, which is why economists always insist on pointing out that mere inflation does little harm. The harm is done, though. It&#39;s just one step removed.</p> <p>We&#39;ve already talked about the damage done when taxes are owed on the illusory profits on transactions that were break-even or worse. This drains money out of the economy at every transaction. The government can mitigate this harm in several different ways (cutting tax rates being the easiest, but also through any of a large variety of tax indexing or tax rebate schemes, special allowances, deductions, credits, etc.), but the capricious nature of where the harm lands (on transactions between parties, rather than on the economic activity itself) produces perverse incentives to agglomerate businesses together. This is not invariably bad, but it is often bad--you generally get maximum efficiency when each entity specializes, but you don&#39;t get enough efficiency to outweigh the tax disadvantages when inflation rates are high. </p> <p>Another way that inflation hurts the economy is that governments are highly prone to try to attack the <strong>symptom</strong> of inflation (rising prices) rather than the <strong>cause</strong> (money becoming less valuable). The usual tactics are price controls, wage controls, and various kinds of tax policies designed to punish wage and price increases (or reward companies that &quot;hold the line&quot; on prices and wages). These all harm the economy, because the price changes are just symptoms. All price ceilings do is produce shortages, because the market doesn&#39;t stop functioning just because the government creates a rule.</p> <p>The third big way that inflation harms the economy is that it creates uncertainty. The &quot;positive&quot; effects of inflation (increasing business activity) only come when inflation is higher than expected, so inflation rates tend to keep rising until they get so high that the negative effects become unbearable, at which point inflation gets ground out of the economy through a recession. Since no one knows just when that recession is coming or how bad it will be, people tend to be more cautious. The result is slower growth, less long-term thinking, and less long-term investment.</p> <h2>Ending inflation</h2> <p>Governments (through the central bank) cause inflation, and governments can end it anytime they want, by ensuring that the money supply doesn&#39;t grow faster than the economy. But, of course, it&#39;s not that easy.</p> <p>First, nobody knows how big either the money supply or the economy actually is, and the tools for controlling it are blunt instruments. There are statistics that give people a clue about how big each was as of a few months ago, but that&#39;s only a partial indication and it&#39;s already out of date. Back in the 1970s economists liked to use the analogy of driving a car while looking in the rear-view mirror by alternately stomping on the accelerator and then on the brake.</p> <p>Second, if the money supply has already outstripped the growth in the economy (which it has, for many years now), then the effects will inevitably work their way through the economy, producing however much inflation is necessary to bring things back into balance, no matter what the central bank does now.</p> <p>Still, all periods of higher inflation end. Some end with the inflation rate coming back down to the rate where it doesn&#39;t do much harm to the economy (basically, to where it&#39;s small enough that things like changes in relative prices and changes in standards of living are more important than inflation, and the inflation component just vanishes in the noise of the economy). Others end with hyperinflation making the money worthless, at which point it is replaced with something else.</p> <p>Based on the experience in the US so far and the current situation, I don&#39;t think the hyperinflation scenario is likely. So that means that your strategies for living with inflation need to handle the situation where money supply growth slows and the inflation rate drops--a scenario that usually involves a recession.</p> <p>Once the central bank moves to stop inflation in a serious way you need to turn around the strategies you used for surviving it and instead <a href="/preparing-for-a-recession">prepare for a recession</a>.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/how-to-live-with-inflation">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-5"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/more-than-just-inflation">More than just inflation</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/stag-hyperinflation">Stag-hyperinflation?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/inflation-is-going-away-for-a-while">Inflation is going away for a while</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/preparing-for-a-recession">Preparing for a Recession</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/living-within-your-means-isnt-nasty">Living within your means isn&#039;t nasty</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance depression gold inflation price recession rising prices Fri, 18 Jan 2008 08:10:26 +0000 Philip Brewer 1645 at http://www.wisebread.com