For several months, we have been witnessing a price explosion reminiscent of the 90s, with the despair of seeing our wages become less and less valuable. What is happening, why and what can we do?

Inflation between figures and realities

Officially, at the moment, the inflation rate is 15%. Probably the method of determination is methodologically correct, but statistics give us the average value for all prices, that is, some prices rise more, others less, some prices fall, the average value is less relevant, the greater the spread, the deviation from the average being very high.

From my point of view, and probably from the point of view of many other citizens, the real inflation is about the products we buy in the region where we live. From the list of products and services that I consume, prices have increased by well over 15%. I seem to like being in the 15%+ deviation zone. I’d say inflation in my family’s basket is closer to 70% at purchase prices.

Another real phenomenon I observe is contraction inflation. For many products, the price is similar to last year, but the quantity in the package is smaller. A package that last year was 150 grams, 3 lei, this year is 100 grams at the same price. Only those who follow the price per kilogram will notice the difference. A bottle of perfume that was 100 ml last year is sold for 80 ml this year at the same price.

Q-inflation (a coined term) preserves price and quantity, but dramatically reduces quality. For example, the amount of meat in a kilogram of chicken legs or minced meat is less this year than last year. Various additives are added to the scales. For example, one kg of minced meat yields 500 g of baked roll, one kg of pork yields 400 g of steak, and one kg of fish fillet yields 200 g of steak. This year, the phenomenon has gained particular concern and has become somewhat generalized. According to statistics, a kilogram of chicken meat is a kilogram of chicken meat, regardless of quality compared to the previous year. On the other hand, the lack of research on the topic may simply be a difference in perception. Perhaps these phenomena were as present in previous years as they were this year, but I ignored them.

Looking at the inflation graph from my personal experience, it seems completely out of line with reality. Maybe other people in other parts of the country with different consumption habits have much lower personal inflation. In fact, if you take government-calculated inflation into account, I’m more likely to be unwell, live in the wrong city, and have bad spending habits that expose me to higher-than-average price increases. If we take as an example the flour that we consume at home to make bread with mayonnaise, then it has risen in price from 3.50 to 6 lei, i.e. by 71%. That is, a kilogram of homemade bread probably costs 7 lei, if you count electricity and other costs. The same bread in the supermarket costs 12 lei/kg and, from my point of view, it is of much lower quality (contains substances that I do not want to consume). It is interesting to note that last year the bread in question was 500g rather than 400g and cost much less per slice.

If we leave aside the bias of personal experience, then perhaps the problem is also in official statistics, there have already been such mistakes in the world, we would not be the first and we would not be the last. Notional inflation is much higher than official inflation. Certain components of the calculation may need to be updated, or procedures for collecting price information may need to be reviewed.

A note related to the war in Ukraine and inflation. Looking at the (linear) trend of inflation from April 2021 to the present, the war does not seem to cause a significant change in the trend, and inflation is within the expected range with or without the war. Perhaps this is an effect, but more likely it will be seen in the next period, on the other hand, it is possible that the economic war began long before the classical war, and inflation was a weapon launched against Europe before the war. became a reality. I don’t know which point of view is correct. But both are bad.

How to protect our incomes from inflation?

Inflation means that money loses value. The first problem is the amount of personal income, which, if it remains unchanged in size, reduces purchasing power. From personal income, we cover living expenses, food, energy, gas, fuel, contributions, clothing, etc.

The first step we have to take is to be very careful about the prices and very careful about what we buy and be careful to buy the product from the cheapest supplier. A rational consumer carefully monitors prices and knows a fair price, always choosing products at the best price. One of the ways to reduce purchase prices is the wholesale purchase of products. For example, detergent for 5 liters instead of 500 g, flour for 3-5 has even 20 kg instead of flour for 1 kg, and so on.

Great attention to product quality. There are methods of reducing production costs that implicitly lower selling prices, noting that this seriously affects the quality of products. So the cheapest product can sometimes actually be a lower quality product. Meat is often injected with a mixture of salt, sodium nitrate, sodium nitrite, phosphates, monoglutamate, starch, sugar and other wonders. One of the effects of this injection is an increase, sometimes by 50%, in the volume of water in the meat. Therefore, if you buy meat in some supermarkets, you may be surprised to buy half meat and half water for the price of meat (a cheap product) or, in a butcher shop, fresh meat is almost twice as expensive ( more expensive product). After cooking, when the added water evaporates, you will be surprised to have 400-500 grams of cooked product in the first version, 800-900 grams in the second version. In conclusion, we recommend that you pay close attention to the price, pay even more attention to what products you are comparing/buying.

The second step is moderation. We throw away a huge amount of food. There are scientifically documented patterns of behavior in which consumers buy excessive amounts of food, much of which ends up in the trash uneaten. If we talk about clothes, then every family has a fairly significant amount of purchased and unused clothes, and perhaps an inventory of existing clothes will help make a rational purchase decision.

The third step will be the rationality of purchases. Whether we realize it or not, many purchases are random impulses unrelated to real needs. It could be a bar of chocolate at the checkout, a juice or energy drink in line at the supermarket, a vase or bowl in the window, or anything else. A good idea is to go shopping with a list, thinking from home and after eating. It has been documented that a hungry shopper tends to buy more than they intend or need. Sometimes we buy our kids expensive toys or clothes that they don’t like or need, but that make us feel like we’re responsible parents, or we have a false sense that they’re compensating for the lack of time we spend with the kids. No child really needs to have a pony or a giant teddy bear when you come home from a delegation.

The fourth step requires work, effort, time, investment and is not available to everyone. Become a prosumer! Do you have an unused yard? Now you can create a greenhouse and grow your own vegetables for your family, cheaper and better quality than commercial ones. You can install solar panels on the roof, have hot water, or electricity, or both. Organic waste can be recycled and turned into biogas. Vegetable waste can be briquetted and turned into pellets for the boiler. Buy food in its basic form and grow the food you need instead of buying it processed. Buy flour and produce bread, buy grapes and produce wine. We buy milk and produce cottage cheese, yogurt, cream. Many Romanians have been doing this for a long time. I have a good friend who brews his own beer every day. Not participating in exchanges does not affect your inflation.

During a crisis, whether you like it or not, you have to tighten your belts. Inflation is equivalent to a permanent decrease in wages. Unfortunately, this phenomenon can help our family budget, but it is a behavior that reduces consumption. At the level of society, the austerity of individual behavior creates a crisis. What you buy turns into income for companies, taxes for the state. From a macroeconomic point of view, I have to recommend you to buy as much as possible, especially Romanian products. So, if you follow my recommendations above, at least in the first stage, you will become a crisis engine.

The essence of economic development is the exchange and replacement of self-service with industrial goods and services. If wages were to rise, the rational behavior would be to forego self-employment and purchase goods and services so that the time spent on self-employment is used for recovery so that labor productivity is maximized. Unfortunately, excessive inflation means economic involution. We can adapt or we can be eliminated.

How should we manage our finances in the face of inflation?

As inflation affects your income, your ability to save decreases and at some point it becomes negative. Many pass from the phase of accumulation of savings to the phase of consumption of accumulated reserves, and then to the phase of lending. Obviously, we want to maintain our lifestyle, and this forces us to maintain our consumption behavior even in the face of declining incomes.

Most people prefer an illusion, a comfortable appearance to a harsh and uncomfortable reality. This is one of the reasons why the cars we drive are more expensive than is reasonable, the clothes we wear are more expensive than our actual income and wealth, it is the reason why the phones we buy are sometimes unnecessarily expensive. Appearances and illusions are expensive. This forces us to live above our income level, covering the difference with loans.

I think the saving behavior of Romanians can be seen as an orientation towards reserves rather than towards investments. Reserves are oriented towards minimum risk, while investments are oriented towards maximum benefits and involve the acceptance of risk. For this reason, those with significant reserves tend to turn to real estate purchases and bank deposits. Whatever happens to the money, land is land. Money from bank deposits is available immediately if there is an urgent need. Read the whole article and comment on Contributors.ro