TAKE CHARGE OF YOUR MONEY
How to combat inflation
INQUIRER.net
First Posted 09:01:00 06/17/2008
(This is part of Take Charge of Your Money , a partnership between INQUIRER.net and Citibank to help readers handle their personal finances well.)
Question: It’s been in the news lately that the inflation rate has been at its highest since 1999. We in the middle class feel its effects, since the prices of all basic goods have considerably gone up since last year. How do we combat inflation? — Don
Answer: Just a couple of weeks ago, the Bangko Sentral ng Pilipinas indeed announced that the inflation rate for May 2008 was recorded at 9.6 percent, the highest since January 1999 when the inflation rate was 10.5 percent.
This means that the prices of consumer goods and services have increased by that much on the average, and that we are near the situation we were in back in 1999.
What causes inflation to spike up? Many factors account for this. One is the increase in international oil prices. As a barrel of oil skyrocketed to more than $130 per barrel this year, pump prices worldwide have gone up as well. And because many industries depend on oil and gasoline to run their manufacturing operations, everything else is affected, from food to electricity charges.
Another reason for the steep hike in inflation is the tight supply of rice worldwide. This supply problem has driven up the cost of rice, and affected other goods as well. We Filipinos are more affected than other countries since rice is our staple food.
Still another reason is the increase in transport fares. Most of the population depends on public transport to get to their destinations. As a result, the prices of basic commodities sold in the market have increased, triggering the price hike in almost everything else.
Inflation is a normal occurrence in the economy. Simply put, it is the general increase in prices. This is why over time, you’ll notice that the P1,000 you had last year cannot buy today as much in the supermarket as it did before. Going back some more, the P700 tuition fee for a 21-unit full load per semester in a private college 20 years ago is now equivalent to several thousands of pesos per semester.
In some years, the inflation rate is not as high. Last year for instance, the country had a 2.8 percent inflation rate on the average. Life was better then as compared to now when prices are so much higher. Inflation decreases the purchasing power of the peso and affects the value of one’s savings and investments over time.
The government does its share in curbing inflation. For instance, it sets interest rates as a control mechanism. Recently, the government also announced subsidies to the poor so they can cope with the rising prices of goods, even as it finds ways to secure an adequate supply of rice.
Combating inflation
Inflation is part and parcel of the economy, and one cannot do much to lower it. But there are some ways to cope with it. Here are some of them:
1. Find ways to increase your income. Since times are hard, now is the best time to pursue a sideline or second job. Do something you’re good at, like baking or tutoring, for instance. The extra money to be earned can go into meeting the family’s basic needs.
2. Hold buying big-ticket items or incurring a huge expense. For instance, if your whole family is planning on traveling abroad this Christmas, consider delaying until the financial outlook is better. Also put a hold on buying big-ticket items such as a new car if it’s not really necessary. You can always settle for a secondhand one.
3. Invest in higher-yielding instruments. If you’re still holding all your investible funds in your savings account, the purchasing power of your money has eroded much already due to inflation. Keep only what is necessary in your savings account, then open a long-term high-yielding time deposit for your excess funds. The rate may not match the inflation rate, but still, it’s higher than a savings account. If you can take on more risk and are adventurous, and have time on your side, consider investing in stocks or bonds, or mutual funds and unit investment trust funds. They may appear on the low end now but over time may potentially earn you more.
4. Consider other forms of investments. Some financial experts have said that real estate and commodities like gold are not as affected by inflation as other forms of investment.
5. Cut down on spending. Get the whole family in this. Assess how you have been spending lately, and see how you can pare this off. There are many expenses you can cut down on, from dinners in restaurants to taxi rides. The money you will save when you cut your spending can help you meet the rising cost of basic necessities.
We’re in for tougher times, but with the drive to weather it, we’ll cope with it well.
(INQUIRER.net and Citibank invite readers to ask questions regarding financial matters. Send your questions to personal_finance@inquirer.net or comment through our personal finance blog called MoneySmarts )
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