You have no doubt heard the word “inflation” in the news a lot lately. But what is it? Does it affect you and is there anything you can do to mitigate it?
If you’re not 100% sure about what inflation is and how it affects you, keep reading. We’re covering the basics below and how it relates to the housing market.
What is inflation?
It is a decline in the purchasing power of currency. In other words, what a dollar can buy.
Inflation means that a unit of currency can effectively buy less than it did previously. This means that it can affect the cost of living, house prices, vehicles, technology, and much more.
You may remember things costing way less in the past and that are now 10-20% more today.
The opposite of it is deflation, which is when the purchasing power of currency increases and prices decline.
What causes inflation?
The main cause of inflation is an increase in the supply of money. If the authorities print new money and introduce it into the market, it effectively devalues the money that already exists. That’s because there’s more of it to go around and each dollar starts to be worth less than it did before.
There are three main types of inflation – demand-pull inflation, cost-push inflation and built-in inflation.
This occurs when there’s an increase in the supply of money and credit. It increases the demand for goods or services faster than the economy’s production capacity.
If people have more money, it means higher spending, which means higher demand. This leaves a demand-supply gap which forces businesses to bump up their prices.
This happens when prices increase, but the supply of goods or services is limited. Reasons behind a decrease in supply could be anything from a natural disaster to a pandemic.
Anything that hinders companies’ ability to produce enough goods to keep up with demand can lead to the cost-push effect. As those goods are in high demand, companies can increase their prices which leads to inflation.
A good example of this is the supply of oil. International treaties, conflicts, or natural disasters can affect the supply of oil which leads to gas prices rising.
The third type is based on the idea that people expect current prices to rise with inflation. When the price of goods or services rises, people generally expect them to continue to do so at a similar rate.
Companies will pay (or workers will demand) a rise in wages to match the rising cost of living. However, this increase in wages means that companies often raise their prices anyway, leading to an expected level of inflation.
Should you be worried about it?
Naturally, your next question might be, “should I be worried?”
Inflation is something that has been going on throughout our lives and is likely to continue in the future. During the time of the pandemic, things have been a bit different.
According to Bankrate, consumer prices increased by 4.2% when compared to a year ago, which has been the largest increase in over a decade.
Since the 1980s, inflation has averaged out to around a 2.5% increase per year. Before then, consumer prices rose by nearly 15% in what economists now call the Great Inflation.
Are we seeing a repeat of that now?
This increase in prices comes as the economy essentially reopens from COVID-19. After months of being cooped up inside, consumers are eager to spend. This has inevitably led to a small boom in inflation, but is it here to stay?
Economists generally believe that the inflation bubble will eventually subside and return to expected levels. However, that doesn’t mean we’re heading for a deflation period either. Prices may not go down, they just might not rise as fast.
How does inflation affect the housing industry?
Just like any other goods or services, it affects house prices and demand as well. If inflation increases, which it has, this generally leads to higher house prices.
However, it’s not just inflation that caused house prices to rise. Low-interest rates can also make buying a home more affordable, but this increases the demand for homes.
What we’ve seen over the past year is essentially more buyers in the market, but the supply of homes hasn’t really changed. Naturally, this has led to an increase in prices.
Most people are used to seeing house prices rise over the years, but the recent boom in inflation has made buying a house more difficult for many first-time buyers.
The good news is that it’s believed the housing market boom will slow down in the coming years to a more manageable level once demand has eased off.
While buying a house might be a bit tough right now, it’s not impossible with the right help. With the help of OVM, there are experts on hand to help you through the whole process.
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