I am neither an expert in economical terminology nor with financial vocabulary, but I share one thing that most of us are only too keenly aware of:
How’s that for a non-economically viable term?
What started this topic today was a text from the kids’ dad:
US inflation at 9.1%. Fuck.
I told him I was a little murky about what this means, and he was kind enough to give me the layman’s explanation after which I remembered that I actually did know what inflation meant, I just didn’t connect the dots with all the different parts.
For those of you who are sometimes confused when the financial powers (government, banks) start freaking out about interest rates or percentage points, among other terms, I hereby offer my interpretation of his explanation.
Robert and others of you can probably elaborate this explanation. Please feel free to drop a comment and share your insights.
What is inflation?
Inflation is the increase in cost of items. (Think gas, food, etc.)
What happens when costs of items increase?
With inflation at 9.1% and pay increases running at 1%, the standard of living goes down for the majority of the population. No one can afford much discretionary spending. (Think non-essential items like recreation, entertainment etc.)
How are the banks involved?
The central banks try to control inflation by increasing interest rates on lending.
Central banks are national banks which provide financial and banking services for its country’s government and the commercial banking system. They are also responsible for implementing government’s monetary policy and issuing currency.
What happens when the central bank increases interest rates?
When interest rates at your and my bank increase, it makes it more expensive to borrow money (such as lines of credit, other credit, mortgages etc). As a result, consumer demand is lowered for the types of purchases that borrowing money from banks in the form of credit or mortgages would entail.
Essentially, you’re not going to finance a brand new Lexus when interest rates on your contract increase dramatically (unless you’re rich in which case you’re probably not reading my blog post). Alternatively, you might not want to extend a line of credit to supplement the vacation you’ve planned to Europe next fall. Or, maybe you can wait another year to re-shingle the roof or fix the driveway or put an addition on the back of the house or replace the expensive air conditioning system in your car or get botox injections or designer shoes.
Why not keep interest rates low then?
Interest rates here in Canada have been kept artificially low for a long time, for the purpose of growing the money supply. People went out and bought things they couldn’t afford in order to keep up with the Jones (or other, vanity-induced reasons) because money was cheap, so why not?
When my parents bought a house in the 80s and interest rates jumped to 15% (and even higher, I think) they had a hard time keeping up their mortgage payments. (They managed, but many people didn’t.)
But since I’ve become a mortgage owner (early 2000), rates have been relatively low. Keeping interest rates relatively low should result in lower prices and lower inflation across the board, thereby stimulating growth. Why not extend the vacation from one week to two when you’re already there in that beautiful beach condo in Barbados? Why not buy a higher end car when low interest rates won’t make that much of a difference? Why not splurge on the Hermes bag you’ve had your eye on?
Those people who signed up for variable rate mortgages will now have fluctuating mortgage debits on their accounts. Either more money will go out of your account every two weeks or month, or a larger part of the mortgage payment goes back to the bank instead of to the principle.
Making large purchases with borrowed money is a gamble when you don’t know what the future holds. No one could have predicted the pandemic and its massive impact on world economies.
Who is hit hardest?
If you shop for food or drive a car, you’re hit hard. If you have variable mortgage rates or a lot of credit card dept, you’re hit hard. If you have multiple loans to pay off (cars, education, etc) you’re hit hard. If you want a second bottle of booze, you can’t have it. If you want an ice cream sundae at an artisan shop, same answer.
What about store profits?
There was an article floating around recently that some grocery stores are “profiteering” by hiking prices of essential goods and reporting massive profit margins.
It’s sickening, isn’t it. The rich are getting richer, the regular, hard-working families and individuals are barely making ends meet.
How can they get away with this? Hunger, or the more politically correct term Food Insecurity is affecting a larger percentage of families now and there is no relief in sight.
I’m also noticing an interesting trend among all these younger people, many of whom are my kids’ generation: they have less interest than anyone I know to join some conglomerate and make a career of it in the future. As a result, some of these companies have offered all sorts of perks, like pay for education, benefits, higher wages to attract young workers and, more importantly, retain them.
I’m not sure how this is all going to end up. I also don’t know how many people’s pensions and long term investments are doing amid all this instability.
Do you have anything to add to this article?
Thanks for reading. Looking forward to the comments.