High rates of inflation diminish the overall quality of life – ensures income and savings are less valuable and damages major segments of the economy
Williams 22, (Geoff Williams is a Loveland, Ohio-based writer specializing in personal finance and small business issues. He has been freelancing for 30 years, writing for numerous publications including The Wall Street Journal, U.S. News & World Report, CNNMoney.com, Reuters and many more.) “Why Is Inflation Bad? 3 Effects Of Inflation," Forbes Advisor, 7/29/22, https://www.forbes.com/advisor/personal-finance/why-is-inflation-bad/ // EE
If rising prices for essentials is eating into your budget more than normal, you probably aren’t putting as much money into a savings account. A June 2022 Forbes Advisor-Ipsos survey found that 42% of respondents were saving less money than usual.
“Inflation makes all of our income and savings less valuable,” says Todd Steen, professor of economics at Hope College in Holland, Michigan.
If you’re not able to save as much as you used to, you may be less prepared for financial emergencies, forcing you to rely on costly credit cards or loans to pay unexpected bills.
And even if you have money in savings already, that decreased purchasing power means your emergency fund might not stretch enough to cover a financial crisis during an inflationary period.
If you have $1,000 socked away for a rainy day, you’re certainly better off than not having it. But here’s an example of how inflation can eat at the value of your savings.
Car repair prices went up 9% from June 2021 to June 2022 according to the CPI. If you had a $900 car repair in June 2021, in June 2022, that same car repair would have been $981. Suddenly your $1,000 saved up is a little less valuable.
And this trend may continue for a while, according to Steen.
“Inflation is a difficult problem to get rid of in an economy, because when prices increase, workers want to have higher wages and salaries to keep up,” he says. “This can lead to future price increases, and the cycle continues.”
3. Loss of Goods and Services
Some industries do pretty well during inflationary times, particularly ones in which you can’t hold off your spending indefinitely, like supermarkets, gas stations and funerals—but some businesses are completely devastated.
That’s because when inflation runs rampant, consumers spend their money on products and services that they absolutely need, and hold back on what they don’t.
You’re going to get your car repaired if you need it. You’ll keep spending money on food.
But you might not take your kids to a trampoline park. You might instead opt for a free city playground with the youngsters, instead. Decisions like that are understandable when prices are high but collectively, they can damage segments of the economy.