Written by Shanee-Leigh Greaves

We go to the supermarket every week and it seems like we are spending more for the same things we always buy.  Frequently, we hear the term ‘inflation’, used as the explanation, but what is inflation?

Investopedia defines Inflation as “the decline of purchasing power of a given currency over time”.

It is a metric, to measure how much more we will have to pay over time for the same basket of goods or to use a service. Explained simply, in 2012 when you had $1,000, you could get 10 beef patties. Now in 2022, you may only be able to purchase four beef patties with the same $1,000.

Low, consistent, and, most importantly, predictable inflation, according to most economists, is desirable for an economy. When inflation is modest and predictable, it is easier to capture it in price-adjustment contracts and interest rates, which reduce its distorting effect. On the flip side, aggressive inflation erodes business and slows down an economy. The Bank of Jamaica’s primary policy objective is maintaining low and stable inflation, a policy called inflation targeting.

Although it is hard to avoid inflation, there are certain things you can do to reduce its impact on your money. Here are tips you can employ to help you Survive Inflation.

1. Evaluate your spending habits

The first and most important step to surviving inflation is to consider your income and evaluate your spending habits. With the price of many things on the rise, now is the time to be frugal. 

A great way to help you to have oversight of your spending is to create and stick to a budget. Your budget is a working document and should be reviewed each month. It is one of the most important tools in establishing a prosperous financial future because it allows you to make the most of your money.

Categorizing your expenses as follows will guide you to cut back:

• fixed committed expenses

• variable committed expenses

• discretionary expenses.

Fixed expenses are, as the name suggests, a fixed amount each month such as your mortgage or rent. Variable expenses vary from month to month based on need; for example groceries and gas. Discretionary expenses are those that make life more enjoyable, including leisure activities, and they should be the first to adjust while catering to the holistic self.

Examine each expense category and look for items that can be reduced or eliminated. Be a bargain shopper; look for less expensive substitutes for necessities. Some supermarkets offer discounts on fresh produce on select days. Also, use your loyalty cards when making purchases as these give you discounts and/or cash back and some utility companies give early payment discounts; take every opportunity to access these savings.

2. Use debt sparingly

When inflation is high and rising, central banks can use contractionary measures to temper consumption, usually by hiking interest rates. Higher interest rates cascade down to consumer credit products such as loans and mortgages as the cost of borrowing rises, making them more expensive to maintain and access.

I am tempted to say no new debt, as debt, if not managed properly can set you back on your financial journey. New debt adds a new monthly obligation to your budget and limits your financial flexibility. However, if you must get a loan, avoid variable rate loans in a rising interest rate environment and only take on loans that will add value, like an investment and a mortgage. Stay away from consumption loans, such as, for recreation or to purchase furniture. 

For existing loans, see how best you can try to pay off high interest debt (eg. credit cards), reduce the balance significantly or consolidate into a lower rate personal loan with predictable payments.

Finally, always pay in full and on time. This simple tip can save you money on late fees.

3. Reconsider Large Expenses

Do you want to buy a new car or do you want to remodel your kitchen? If you have not already begun that process, now may not be a good time to start, especially if you are thinking about taking on a loan to achieve this. Purchasing a car or new furniture during this period might leave you more susceptible to higher prices.

4. Invest

You should always invest, and an inflationary environment is no exception. An investment rule of thumb is to keep three to six months’ spending in an emergency fund that is accessible, and if you have savings that you do not expect to use for a year or more, you should consider investing those funds.

During inflation, higher interest rates may apply to deposit accounts as well, implying that financial institutions may begin to give higher interest rates on savings accounts, repurchase agreements and other fixed income investments. While variable rates on loans should be avoided, variable interest rate investments can help you to maximize your return if interest rates are expected to increase. Investors should consider investing in the Government of Jamaica Treasury Bills and Debentures which are offered as auctions. A Debenture is a bond issued by the government to raise funding and typically has an auction feature in which investors can bid/request the yield they desire. The Treasury Bill also utilizes an auction approach and is a guide as to the rate investors are demanding.

It is important that you consult with an investment advisor to seek personalized investment strategies to help you navigate.  In your discussions, consider holding shorter-term bonds, dividend-paying equities and holding funds to capitalize on any investment opportunities as they arise. Regardless of whether inflation rises or falls, it is a good idea to keep an eye on strategies to improve your savings.

Shanee-Leigh Greaves is a Trader with VM Wealth Management. She is passionate about financial literacy and building a career in the finance industry. Shanee-Leigh is currently preparing for CFA level two exams.