If, over the past months, you’ve felt that things got really expensive really fast, you weren’t wrong. The increase in the level of prices of goods and services is a phenomenon called inflation which, in a nutshell, explains why you can buy less with €1 today than you could have bought yesterday.
Inflation is measured considering a basket of selected goods and services such as food, fuel, cars, clothes, banking and hairdressing, amongst others. The basket usually reflects the purchasing habits of people living in a particular country, whereby the level of prices is measured periodically.
However, inflation isn’t always bad. In fact, moderate inflation is a typical sign of economic growth and progress, with high inflation tending to feed on itself and impair the economy’s long-term performance.
That being said, you may ask, “is Malta’s level of inflation worrying?” Well, even though the country’s 6.8% in January 2022 is one of the lowest inflation rates in the eurozone, this is still much higher than the desired 2%, with the current global economic and political scenario causing an increase in price levels.
Unfortunately, there is no easy solution, but central banks brace for the most negative effects of inflation by increasing interest rates. By doing this, the consumer pays more when borrowing money but gets more money when investing in assets with a positive relationship with rising interest rates, such as real estate and stocks.
If you’re saving money in your bank account, inflation will erode the real value of your savings. If you have a loan, increasing inflation will decrease the actual value of your loan over time and if you are an investor, and you are receiving fixed interests, the real amount of your return is less than it was before because now you can buy less goods or services than you could have bought yesterday with the same amount of money.
What happens if I have a home insurance policy? Well, inflation could also impact it. As a client, the sum you have insured is the total amount for which you are covered and the maximum amount your insurers will pay you for claims. If you get this insurance value wrong and it is lower than the real value at risk, then your premium will be based on the wrong value and will be lower than you should have paid to cover the property at risk. For example, in case of a home insurance, the sum insured may not reflect the real value of the property and the relative costs to reinstate or repair it, specifically due to the increasing levels of inflation and higher cost of living.
Ultimately, as a consumer of financial services, you should understand what the impact of inflation on your investment or saving decisions is. In any case, always check the real interest rates linked to your payments or returns, and if in doubt, ask your service provider to provide further information.