Have you noticed that when you go shopping at the market or supermarket, products are more expensive? Even though you stick to your budget, the money you spent a few months or weeks ago is no longer enough. This usually happens due to the economic phenomenon known as inflation.
Can you explain what inflation is and what causes it?
According to the Bank of Mexico (Banxico), inflation is an economic phenomenon derived from a generalized increase in the prices of goods and services over a prolonged period. In other words, inflation indicates that prices increase and purchasing power decreases. There are several causes for the inflationary phenomenon, the most common being the following.
When there is an excess of money in circulation (either by an increase in wages). People believe they have more resources and increase their expenses, which causes a greater demand for goods and services, causing the productive capacity of a country to be exceeded and, with it, shortages and a generalized increase in prices.
If the price of a given good or service increases, it "spills over" to the rest of the market, causing structural inflation.
If the price of one or more factors of production rises, for example, raw materials, oil, or energy, this has an impact on the final cost of the product or service and, therefore, on consumption; this effect is known as cost inflation.
What actions does the government take to combat inflation?
To stop this from happening, it's important to know several things, such as how fast prices are going up so that steps can be taken to stop the rise.
For this reason, the National Consumer Price Index (NCPI) was created, which is a figure that reflects how the prices of goods and services consumed by families in Mexico have changed.
The National Institute of Statistics and Geography (INEGI) asks Mexican families about their income and how much they spend to find out which products they buy the most.
Once these products have been identified, the information is compared on a biweekly, monthly, and annual basis to know how prices have changed.
To measure inflation in Mexico, INEGI monitors 235,000 prices in 46 cities each month. With all this information, the Bank of Mexico implements measures to control inflation since it is in charge of regulating the amount of money circulating in the country.
The Bank of Mexico controls inflation through monetary policy, using a targeting scheme: first, it defines the inflation rate; then it observes and analyzes the causes to foresee its future behavior and to avoid deviating from its inflation target; and lastly, it takes action by moving the interbank interest rate.
How does all this affect my finances?
When inflation goes up, it starts a chain of things that hurt people's finances, like:
Loss of purchasing power, that is, money begins to lose its value, resulting in the fact that with the money you have, you buy fewer things than before. Let's take an example: you go to the supermarket to do your biweekly shopping. If a year ago you spent 500 pesos for all the products on your list, now for those same products you spend about 600 pesos.
There is an increase in interest rates: the reference rate is the one that determines the cost that banks pay for lending money; therefore, this determines the interest they charge for the loans they grant to their customers. When the interest rate rises, the aim is to discourage consumption, preventing people from spending too much and thus curbing inflation. Conversely, if the interest rate goes down, loans become cheaper, allowing people to consume more.
Inflation jeopardizes people's savings and investment possibilities since, by requiring more money to acquire the products and services you need, your savings capacity decreases.
Rising prices: When there are periods of inflation, generally the prices of the products we consume the most (basic food baskets such as fruit, meat, poultry, energy) are the ones that tend to rise the most, so in some ways, it affects us all.
Lower capital gains, that is, reflect lower yields, due to the increase in interest rates, since this action reduces the value of the assets in which the savings are invested.
Tips to protect your pocket from inflation
All people are affected by inflation, and since it has been high in recent months, the best thing for your wallet is to start taking certain actions to prevent your money from continuing to lose its value, such as:
If you have savings or have the possibility of investing, we recommend you invest in a fixed-term deposit, diversifying your portfolio through products that allow you to eliminate the risk of inflation, in addition to investing in a regulated institution.
If you don't have to, it's best not to take out any credit because the interest rate will only keep going up.
For these times, you must control your expenses. For this purpose, prepare your budget and stick to it. This will allow you to visualize where you should direct your income to satisfy your most necessary expenses. When you create a budget, you evaluate the areas of opportunity that can help you cut those ant expenses that prevent you from saving.
If you are going to purchase any product with your credit card, try to look for options that have interest-free months.