To what extend do we feel inflation? (WSM Opinion)

Arriyan_ba
november 6, 2022

I think it may even become one of the most googled words of the year, ‘Inflation’. Everyone is talking about it and most of us are actually feeling it, or we say we do.

So what is inflation?

Inflation is the process of currency devaluation due to rising product and service prices. Note: it’s not about the devaluation of the currency against another currency, but against goods, such as clothing, energy and groceries. According to most central banks, a healthy economy should have an inflation rate of about 2%. We’ll discuss the reason for this and why central banks are scared to death for deflation in another article.
It might be important to understand why we get inflation in the first place, in order to understand the rest of the article, so I will try to explain this briefly and write a more in depth article on inflation later this month.

Critics may judge my explanation, but this makes it easier to understand the technical stuff, which I promise we will discuss in future articles.
In a growing economy you see a lot of new businesses, many job postings, increasing wages and steep credit increases, since money is cheap (,meaning that the interest rates are low)! So what happens simultaneously? People have a larger amount of money left to spend, which they most certainly will, leading to tighter supply while increasing demand. If you understand the basic equation of supply and demand this should trigger a bell. No.1 – Higher demand with no change in supply leads to higher prices. No.2 – Even higher demand with less supply leads to huge price increases. Very simple, but if not explained properly it tends to cause confusion. (If you’d like to read more on supply, demand and supply chain issues, subscribe to the mailing list! there is a lot of content coming up.)

So what happened during 2021?

With all these lock downs, stimulus packages and money printing the Central Banks created a ticking time bomb which had to blow sooner or later. I’ll try to explain this in a simple manner again, so I will leave some details out.
During the lock down most people were sitting at home being unable to spend their money, saving it or investing it. Once the pandemic was over people had a bunch of money they could go and spend, almost making it look like they had to make up for lost time!
So what happens? Supply shocks! Vacations got extremely expensive, gas prices started to rise again, clothing and food got more expensive and so forth. Then in early 2022, Putin decides to invade Ukraine, which led to trade restrictions in oil and gas, causing a huge energy crisis. This time demand was already high, since we needed to warm our houses in order to survive the winter and supply just dropped drastically. All these unforeseen circumstances lead to the soaring inflation we experienced during this last year.

During the first half of the year we broke a four decade high, printing a 9.1% inflation number. The previous high was set January 1982, reporting 8.4%. According to the most recent report (September 2022 – 2021) the current US inflation rate is as high as 8.2% (year on year). The rate seems to be decreasing, meaning that inflation is slowing, but in my opinion the decrease is only because of the fluctuations in the energy sector.
Meanwhile the Federal Reserve is aggressively raising interest rates trying to slow down the economy, making money expensive again, ultimately pushing the world economy in to economic shrinkage for as long as necessary.
When the economy shrinks the opposite of what I explained earlier on growing economies happens. Money gets expensive, since borrowing costs rise, companies see decreasing sales and huge profit cuts, people get layed off (as we’re seeing a lot in tech right now) and ultimately we start to see defaults which lead to many more people losing their jobs… you get the picture.

To what extend do we feel inflation?

In Europe the inflation number is even worse. In September the Euro area printed a 9.9% inflation rate (YoY).
I have been observing this development since 2021, and here are some things I noticed of the top of my head:

On average I spend 12% more on a full gas tank. (April 2021 €1,78/L – November 2022 €2,-/L) – +€432 a year
The standard RL Polo’s that I buy once or twice a year have become 20% more expensive same goes for most of my other clothing (July 2021 €70 – November 2022 €84) – +€240 a year
My membership fee at the boxing gym has become 14% more expensive (January 2022 €39,50 – November 2022 €45) – +€66 a year
My Apple Music Membership fee has become 20% more expensive (January 2022 €5 – November 2022 €6) – +€12 a year
Restaurants, food delivery services and grocery stores have increased their prices by about 15.4% on average (august 2021 – august 2022) +€520 a year

The sum of these expenses alone, combined (viewing my personal expenses, not having to pay rent or energy) gives me a result of €1270 extra which is caused by inflation. That equals about €106 a month!

In conclusion

For this article I viewed inflation through my own eyes, a student with not that much of a financial burden, and discovered that I’m paying at least €100 extra on a monthly basis. I didn’t even count in the price of tech stuff I buy, insurances, other subscriptions, Parking fees, etc.
I could conclude that this must be incredibly hard for some households having to do groceries for themselves and their kids, in addition to the insane energy prices of the past few months.

If you have any questions or comments, please send me an email. I respond within 24 hours via arriyan@westudymarkets.com.