Inflation for millennials - Kardashians, cinema tickets and Ibiza
Inflation is the name and eroding your savings is it's game. For many, inflation is an economic term thrown around the news or their workplace which has little impact to their daily lives, right? Incorrect my millennial friend. Inflation influences interest rates, directly impacts our savings and how much we pay on our mortgages. That’s not even scratching the surface on how many victims inflation can hold hostage.
According to the Telegraph, research has shown that millennials are suffering twice the inflation rate of baby boomers. Supermarket price wars may have driven prices down over time, however, Fidelity believe only 8% of millennial income is spent on groceries and soft drinks. Spending disposable income on rent, smartphones, meals out and experiences seems to be taking it's toll. What are we gonna do with ya eh?
What is inflation?
When your Nan says, ‘Back in my day, a cinema ticket was £1 and now it costs £12.80 to sit on a seat with chocolate mushed into the arm rest’ - she is referring to the phenomenon they call inflation. One speaks of this concept when there is a general increase in the prices of goods and services over a period of time. As we will see, this has the ability to damage our buying power.
What causes it then?
Bankers, economists and politicians love to discuss what causes inflation, however, it’s not as black and white as one would assume. Here are 2 examples of what can create inflation:
· Demand vs Supply - Imagine if the latest make up on the high-street is now endorsed by the Kardashian clan. As a result, demand for the product hits the roof and outstrips supply. This desirability creates scarcity and pop goes the price, making your wallet feel that much lighter. Fantastic excuse for not buying your girlfriend the makeup she wanted for her birthday.
· This example is playing out in the market at the moment and it's all related to currencies. The weakness in GBP can be bad news for your business which imports raw materials from abroad to produce goods with. As the cost of production increases, you decide to pass on this annoyance to consumers by hiking the price of your product. Pop goes high-street prices and hello inflation. So remember, currency fluctuations don’t just matter for your lads holiday to Ibiza this year!
4 ways higher inflation can impact our daily lives?
· The savings underneath your mattress lose their purchasing power – meaning your money has to work a lot harder to maintain the same standard of living. You may think putting your money into a regular savings account would combat this issue. However, if savings rates aren’t beating inflation then your money isn’t growing to reflect the rise in prices – meaning you struggle to protect the value of your cash. Let’s hope your boss gives you a big enough pay rise to knock inflation out in round one.
· Millennials have been slammed for not taking into account long-terms goals such as retirement planning. Inflation doesn't make it any easier - your pension pot target just keeps going higher and higher, as you have to put away more cash today to give you the same quality of life tomorrow. Ultimately, it's like shooting at a moving target. The trade-off is living for today vs investing in the future (more wrinkled and rounder) you.
· It affects our mindset. If the media, economists and banks bang on about higher inflation expectations, people often spend sooner rather than later. “Jim, just buy the laptop now as prices might be higher in a few months”. Yes, this spending stimulates the economy, however, it can deplete your savings and make you give up on saving all together. In this scenario, it’s easy to grab the dangled carrot of debt, however, a credit card is not the answer!
· One way governments combat inflation is by hiking interest rates. How? The increase in borrowing rates implies people will spend less, so the Kardashian endorsed makeup will see a reduction in prices – kapish? Higher rates might mean happy days for savers, however, it can squeeze millennials both in and out of the housing market. As we all know, mortgages are linked to the Bank of England’s base rate (0.25%), so as this rises, getting on the property ladder becomes increasingly more difficult for you and your finances. For those lucky enough to already own their first home, depending on what type of mortgage you have, you could face an increase in repayments.
In the current economic climate, political uncertainty is the UK's kryptonite and whether we like it or not, it affects us daily. Millennials will note the decline in GBP led to Apple raising it's UK app store prices by 25%. However, others will be more affected by rising food prices or petrol prices falling less than expected. The common theme - inflation. Ultimately, it comes down to what you spend your money on and how this impacts your standard of living both today and tomorrow. Just like anything, too much inflation is not desirable, however, a lack of it can be a cause for concern. What I am trying to say is, inflation isn't all that bad! It’s all about understanding how prices impact your purchasing power, whilst building a diversified investment strategy which is inflation proof - easier said than done!