The calculation is pretty simple. When inflation surges but income does not rise at the same rate, the standard of living falls. Then you have to make do with less.
Many people have to cope with this development at the moment, including me.
In Germany, where I live, consumer prices in June rose 7.6 per cent compared to the same month last year. That’s pretty much the same level as average global prices have risen this year (up 7.4 per cent).
What is the best way to deal with this situation?
Basically, there are two reasonable ways.
One possibility is to continue living as before, keep an eye on your account balance and simply spend less in the situation when the account balance approaches the red zone. That is pretty much how I’ve always lived, and this works quite well if the cuts are not so severe, so the way of life does not have to be fundamentally changed.
The advantage of such a hands on approach is that you save yourself a lot of planning work. The disadvantage is that sometimes you can no longer buy anything even when the benefit of a purchase would be particularly high. You might have bought another pair of pants in the middle of the month, and at the end of the month, you realize that you don’t have any money left to go on a weekend trip with friends.
Economic textbooks, with their rational maximization of utility, are more familiar with the second type of people. Those people think about where there are opportunities to save and then implement these savings opportunities. This mailing is about such savings opportunities in times of inflation.
There are five possibilities.
1) Check out which products drive the prices up – and try to reduce their consumption. Admittedly, this advice is self-evident. And it is also quite obvious what is currently causing the price level to rise so sharply; it is the energy costs. In Germany, for example, the prices for heating oil, fuel, electricity, gas and other combustibles have risen by almost 50 per cent year-on-year. However it is often less easy to reduce consumption, the possibilities are fundamentally diverse. Regarding mobility, you can switch to bicycles, public transport and electromobility. And with your home you can try to insulate it better, bring heating technology up to date or lower the average heating temperature.
2) Save money where it’s easiest for you. If you have to pay 100 euros more for energy per month because of inflation, reducing energy consumption by those 100 euros may be challenging. The alternative: check your spending to see what you can most easily live without (fifth pair of pants, maybe?). This consideration can even extend beyond the cause of inflation. What do I really need in life? What might not be required? Learning about your expenses and the (non-)necessity of some of them can be a worthwhile task. – My experience: The accumulation of not-so-necessary “habitual expenses” happens insidiously. That’s why you have to devote yourself to the topic if you want to change something.
3) Live price-consciously. Spending more on a product can have good reasons. Because it was produced sustainably. Because it is of outstanding quality. But we should only pay a higher price if we know what it is good for. A high price itself doesn’t guarantee anything. Low prices, in contrast, signal little effort and resource use. That too can be sustainable. For example, seasonal vegetables are often cheap because they are plentiful and usually less energy-intensive. Regional products can also be more affordable because transport costs are lower. Or let’s think of buying second-hand products that don’t even have to be produced because they have already been made. (For example, did you know you can get an iPhone with the latest operating system for about 100 euros? I didn’t until yesterday when I ordered one.)
4) Try to earn more. Instead of spending less, inflation can also be compensated by increasing income. Inflation might be a good reason to campaign for a salary adjustment with your manager. Or you think about working more. Or look around for a new job with a higher salary. – Cuts coming from outside always offer the chance to start something new.
5) Support policies that promote competition. Nothing is more harmful to customers and consumers than companies with significant market power. Such companies do not have to worry about best customer experience, and they can reduce their quality and increase prices. Market power often drives inflation, in parts also the current inflation. “Monopoly power isn’t the principal cause of inflation, which has been driven by an overheated economy plus external shocks like Russia’s invasion of Ukraine,” the economist Paul Krugman writes in the New York Times, “but there’s a reasonable case that monopoly power is a cause of inflation.” There is a longstanding phenomenon in the fuel market known as asymmetric pass-through or, more colourfully, rockets and feathers, as economists at the St. Louis Fed recently named it. It describes the phenomenon that when oil prices shoot up, prices at the pump shoot up right along with them (the rocket), but when oil prices plunge, prices at the pump eventually fall, but much more gradually (the feather). This phenomenon can best be explained by market power in the petrol station market. Any policy that fights such and other encrusted markets and encourages competition is a policy that also fights inflation. We should support such a policy.
So in competitively organized markets, inflation is often not permanent. Because high prices promise high profits. Subsequently, new suppliers will enter the markets and push the price down as supply increases, and better and cheaper alternatives will be developed to replace the inflationary products. For example, the current high prices for fossil fuels are a drastic accelerator of the energy transition towards regenerative energies. Obviously, not everything about inflation is bad.