Why does inflation need to be solved and how?

The financial world is home to many dangers and pitfalls that can affect businesses and consumers alike. One such threat is inflation, which drives prices of goods and services higher. Unfortunately, it appears that the current inflation wave will make a global impact, affecting the prices of food, electricity, oil, and water. All of life’s necessities will become more expensive, yet people won’t automatically earn more and that is a bigger problem than most may realize.

There are huge consequences of the global pandemic, one being the massive rise in inflation due to the trillions upon trillions of cash injections into the global economy. It was unavoidable for governments to not offer financial support to suffering individuals and businesses alike, but that money had to come from somewhere, and will need to eventually be paid back. As a result, the general population is guaranteed to be faced with the inflationary outcomes of the pandemic for the rest of their lives.

Why Inflation Is A Talking Point

Some people might wonder why everyone is talking about inflation now, all of a sudden. At the same time, one shouldn’t be too surprised. Ever since governments announced they would begin issuing stimulus packages, experts warned about inflation and the impact this ‘helicopter money” would have on the economy. Unfortunately, there was no other course of action, and with the inflation caused by the global pandemic, it seems matters have begun spiralling out of control rather quickly.

Inflation is expected to happen, but it is also expected to be manageable. Prices will rise and a person’s spending power will be less than before. That is the usual way of life, but a sharp increase in inflation can become seriously problematic, putting pressure on a government to increase unemployment benefits and other welfare payments, as well as increasing the value of the state pension. However, as the rate of inflation continues to increase, it becomes more difficult for the government to tackle these issues, creating a vicious circle that if not treated can eventually lead to a complete crumbling of an economy (take for example, Germany 1923). Unfortunately, it appears the government’s current solution is to fix things temporarily, but this is still making the inflationary pit larger and larger, and while offering short term relief for everyone, will not have favourable long term effects.

Even injecting more capital into a domestic economy will not necessarily prevent manufacturers from charging customers more for goods and services. Wholesalers may still face higher costs, passed down to retailers, and eventually, consumers. Everyone has to make ends meet and ensure they recover costs, yet consumers will be the ones left paying the price for doing so.

The trend of passing down increasing costs has become apparent in China, the US, and Europe. Producers charge higher prices, forcing retailers — who already struggle for nearly two years — to increase their markup on goods. As the world’s economy relies on shipping imports from China and the US for many things, higher prices charged in these countries will have global consequences.

Will Prices Go Down Again?

That is the million-dollar question that will never be easy to answer. Consumer prices are currently rising in nearly all countries and these higher prices often tend to stick around for years, if not longer. Some economists, such as Carl Weinberg, chief economist at High Frequency Economics feel things will return to normal soon, whereas others such as Giulio Martini, expect it to become worse. Thus, there is no definitive answer to this question at this time.

There are strong arguments as to why prices will likely continue to climb. First, several economies, including the US and China, have declared being on the verge of “overheating”, which can foreshadow the onset of hyperinflation. Second, the massive relief stimulus both governments injected has created a significant debt pile and increased consumer spending simultaneously. When people have more money, they will automatically increase spending; that is how things work.

The argument as to why inflation can be curbed is that current inflation is only a problem related to specific sectors of the economy, and does not reflect the economy overall. Weinberg states “The rise of selected categories, scattered categories of products within CPIs are making those averages of the basket price move higher, but that doesn’t mean that all prices are moving higher along with all wages,”.

How Inflation Might Affect You

As there are still questions as to whether central banks will raise the interest rates or not, the consumer may think inflation isn’t affecting them as of yet. But, unfortunately, just because central banks don’t explicitly announce introducing inflationary measures does not mean you may be subject to inflated prices already, without noticing it too much.

Car owners will likely have noticed that petrol prices have begun climbing higher. That is usually an indicator of whether inflation occurs, as the oil price is a well-known metric for estimating market sentiment. Unfortunately, consumer prices for petrol have begun to rise month over month and show no sign of reversing course any time soon. It is a deplorable development, but only the tip of the iceberg.

Food prices are another indicator of inflated values. Prices have been surging for nearly 12 months straight, with multiple slight increases every month. The compounding effect of these increases has painted a very worrisome picture from comparing prices a year ago to those today.

As is often the case, some will feel the burden of inflation much more than others. Rising prices will widen the gap between low-income households and the rest. Moreover, they will drive wedges between nations of financial inequality. Spending a more significant part of one’s monthly budget on necessities such as food and drink is far from ideal. All the extra money spent can add up to double- or even triple-digit figures monthly depending on the household.

Gauging Long-term Consequences

While the situation outlined above is far from pleasant, it may only actually be the beginning of a much bigger problem. As the inflationary effects last longer, a greater imbalance of the wealth within society may become more apparent, with many middle and low-income people being pushed further into poverty. People with higher incomes can offset rising inflation with rising incomes. Sadly, though, income inequality and rising inflation can entrap lower-income households in poverty. In addition, research has shown that prices may rise more quickly for those who have lower incomes, a phenomenon called inflation inequality.

Wealthy people have accumulated even more wealth and solidified their position at the “top of the pyramid”. In contrast, everyone else has struggled to retain some degree of spending power, and they are still fighting that battle today. Unfortunately, it seems that the battle will not end anytime soon.

If push comes to shove, inflation may eventually become hyperinflation. It is a real issue in regions like Venezuela, which may seem far from one’s personal life. However, hyperinflation can strike anywhere if the situation is left unchecked, even in the Western world. A rapid price increase can cause inflationary rates of up to 50% a month. Imagine paying $3 for bread, $4.5 the next month, and $6.7 the month after. It seems unlikely to us Westerners, but it isn’t as implausible as you might think.

Is Inflation All Bad?

So far, we have highlighted the bad scenario and the worst-case scenario regarding inflation and rising prices. However, there are also benefits to such a situation, assuming the government can keep it under control.

If inflation remains at a moderate rate, it will help economic growth. That may seem strange, although it is normal for nations to prosper when prices go up ever so slightly. This is because moderate rates of higher prices over a longer period of time allows enough room for wages to also be increased accordingly. As wages increase, this in turn increases the workforce by attracting unemployed people, and can further drive economic growth in a country.

In single-currency zones, such as the Eurozone, inflation is almost a necessity. Such a situation allows relative prices to be adjusted. As numerous EU nations are uncompetitive — yet they can’t devalue — they need to cut relative prices to become competitive again. The current Eurozone system is far from ideal, but a price adjustment is beneficial to those living in those uncompetitive nations, allowing them to make ends meet.

Inflation is beneficial decentralized Lenders In DeFi

Through DeFi protocols like The Standard, anyone with hard or digital assets may borrow the S-EUR — loosely pegged to the Euro — as a stablecoin. These assets are temporarily locked away in either a physical or smart vault (depending on the asset), and you can reclaim ownership when the outstanding loan is repaid. Our approach ensures anyone can access lending and borrowing solutions on demand without much risk. Moreover, in this system, inflation will be beneficial to those looking to repay a loan.

How?

As mentioned, assets used as collateral will be returned when the total amount of S-Eur stablecoin are returned. When inflation occurs, it becomes cheaper to acquire the S-EUR stablecoin from the secondary market, and therefore become cheaper to repay the amount of S-Eur initially borrowed. The best part, you don’t actually have to lose ownership over that asset. Imagine this was the case for Man Laszlo Hanyecz, who who back in 2010 10,000 Bitcoin on a pizza. By using the standard, he could have generated enough liquidity to pay for his margherita while holding on to those oh so valuable BTC. The standard provides a win-win solution for borrowing when it comes to periods of inflation.