Things to do when inflation rises: do not leave the money in the bank but postpone the mortgage

Things to do when inflation rises: do not leave the money in the bank but postpone the mortgage

from Diana Cavalcoli

Pessimism contributes to high prices: calculate domestic inflation (there is a tool on the ECB website). And remember that at this stage, uninvested money is the form of wealth that suffers the most losses

How long will skyrocketing inflation last? Bankers, economists, investors, male and female workers, from different angles and points of view with respect to the market, have been asking the same question for more than a year. Since that is the expensive price is breaking all records recorded in the last forty years. With increases of close to 10% in several countries. United States and Italy included.

The doubts and worries about price increases, some experts fear may last forever, do not spare anyone. Those who manage stocks and capital, those who invest their savings, those who shop, those who buy gas or buy a house. We are all overwhelmed by the great wave of inflation and we are called to live with it on a daily basis.

If, as mentioned, 2022 was characterized by high record prices, it is also true that history teaches us how inflation thrives on (albeit long) flare-ups. Just as it flares up after reaching its peak, it can gradually fade and diminish. It is not a detail to know the inflation dynamics, especially because, in times of high prices, the behavior and choices of individuals can affect consumption and, broadening the gaze, also on the health of the economy. Before understanding which strategies to implement and which ones to avoid in the event of inflation, it is useful to know their numbers and history to look at the medium and long term.

Behind the corner

Some clues as to the fact that inflation is not “forever” comes from overseas. More precisely from the US consumer price data. They rose by 8.5% in July, less than the 9.1 in June. An attenuation linked to the drop in the cost of petrol and the reduction in air fares as well as the increase in transport prices. The slowdown in prices – which in any case remain high and close to the highs of the last 40 years (and will also be evaluated next month) – represents good news for the White House and the Federal Reserve, the American central bank, which had included among the the short-term objectives are precisely the fight against out of control prices.

There are some signs of moderating inflation, President Joe Biden publicly remarked. Thus, at least for the moment, the risk of a recession that would have led to the impasse of the stars and stripes economy is removed. it is good to know that there is inflation and inflation. If in the United States there is talk of increases linked to domestic demand, in Europe and in Italy, as mentioned several times by the president of the European Central Bank (ECB), Christine Lagarde, the bulk of the expensive prices of the Old Continent due to the energy crisis. Which, in cascade, produces increases in the other supply chains affected by the lack of raw materials and the consequences of the war in Ukraine.

In Italy

In short, everyone has to deal with the high domestic prices. In Italy, inflation on the rise in July but the increases in energy prices are slowing down. The same is not true for food spending, which has reached levels never seen since the 1980s. In July 2022, Istat reports that Italian prices have grown by 0.4% on June and by 7.9% on July 2021, from +8 % of the previous month. Above all, in the Italian case, the shopping cart, which rises to +9.1 per cent, is of particular concern. Figures that have not been recorded since 1984, when Bettino Craxi was in the government and the parties clashed on the escalator, the mechanism that automatically adjusted wages to inflation.

ACCORDING TO A STUDY THAT COMPARED THE DATA OF 35 OECD COUNTRIES, SINCE 1990 THE YEARS WHEN INFLATION EXCEEDED 5%, REAL WAGES HAVE INCREASED IN PARALLEL

As reported by the representative association of the agricultural sector Coldiretti, the most important increases concern bread, pasta and rice, with an additional outlay of almost 115 euros per year for families. On the podium also meat and cured meats which will cost 98 euros more than in 2021. In some cities, the increases are felt to a greater extent. According to the ranking drawn up by the National Consumers Union (Unc), which takes into account centers with more than 150,000 inhabitants, Bolzano is the most expensive city in Italy, with an annual inflation of 10%. An increase above the national average which, in practical terms, translates into a higher annual expenditure of € 2,658 for families. Campobasso, on the other hand, is the cheapest city: inflation at 6.9% and additional expenditure of “only” 1,263 euros per family.

The lesson of history

To reassure, at least in part, the army of inflation worries thinks about recent history. Assuming that we are not facing German hyperinflation after World War II or the record high of Argentina and Zimbabwe in the 20th century, all cases where high prices have exceeded 50% on a monthly basis, reasonable to think that inflation could fall in the course of 2023.

CONSUMERS JUST BELIEVE THAT INFLATION WILL SOON MAKE THEM POOR. HERE THE DANGEROUS PROMPT TO BUY STOCKS

The theme is understanding when, how much and what are the damages to the economy linked to the particular inflationary period we are experiencing between the post pandemic and the gas crisis. Even the experts are divided on the subject. L’ Economist has recently examined the data of 35 OECD countries since 1990. In the years in which inflation exceeded 5%, the newspaper notes how real wages have risen in parallel, thus compensating or attenuating the increases. According to several economists, inflation can also have a positive impact on unemployment while harming those who already work at the wage level. After the financial crisis of 2007-2009, for example, the pound depreciated, increasing inflation in Britain and reducing real wages. However, companies could afford to hire more workers.

The psychology of inflation

Therefore, given the shadows and the (few) lights of expensive prices, there is a point to consider. Which has little to do with central bank statistics, rates and calculations. Inflation has major psychological effects on consumers. People rightly believe that inflation makes them poorer. To the point of preventing them from planning, investing money and thinking about the future. In addition to fueling the ASAP syndrome, “as soon as possible”, of immediate purchase because everything will cost more. A pessimism of inflation therefore that fuels the high prices and affects the citizens of a world that appeared low cost for years.

The strategy

So what to do to live with the price rush? A good habit to know “the enemy”. And try to calculate your own household inflation. One possibility is to use the calculator available for free on the ECB website. The principle on which it is based is that individual families have different spending habits. Some nuclei own a car and eat meat, others move exclusively by public transport or follow a vegetarian diet, according to the institutional website. To make the calculation you need to enter your country of residence and then, item by item, the elements that make up the expense. From bread to pasta to petrol and medical expenses as well as bills.

Savings and mortgages

Another good practice is to avoid keeping your savings on bank accounts. A widespread practice in Italy, thanks to the pandemic. Between May 2021 and May 2022, the total amount left in the bank by private individuals increased by over 105 billion euros. According to an analysis by the Unimpresa Study Center, the total balance of current accounts and deposits amounts to € 2,101 billion, an increase of over 5% compared to € 1,995 billion a year ago. An own goal at the time of prices still at a gallop. Liquidity, therefore uninvested money is the form of wealth that suffers the most losses when inflation flares up. The expensive price then affects mortgage rates. Which interests those who already have financing and who wants to buy. For the latter category, it is good to know that the expectation of inflation increases the Eurirs index on which fixed mortgage rates are based. This could make purchasing less convenient than it used to be. The variable rate mortgage is also more risky, a loan based on a rate whose value fluctuates according to the trend in market rates. Rates on the cost of money for which, given the still robust high prices, further adjustments to the upside are foreseeable.

August 31, 2022 (change August 31, 2022 | 08:52)

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