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ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

Oran Hall | Coping with the high cost of living

Published:Sunday | September 18, 2022 | 12:08 AM

The Financial Gleaner of September 9, 2022, reported that, at 10.9 per cent over the 12 months to June 2022, Jamaica’s inflation rate was the ninth highest among 33 nations in Latin America and the Caribbean. Because prices directly affect how much...

The Financial Gleaner of September 9, 2022, reported that, at 10.9 per cent over the 12 months to June 2022, Jamaica’s inflation rate was the ninth highest among 33 nations in Latin America and the Caribbean.

Because prices directly affect how much it costs to live, high inflation leads to a high cost of living.

Inflation is the increase in the general level of the prices of goods and services used by consumers or private households. The rate of inflation is the percentage change in the average price level of a fixed set of goods and services, called a ‘basket’, in an economy over a given period. The consumer price index or CPI is a major index used to measure inflation.

The CPI measures changes in the average price of a representative ‘basket’ of goods and services the typical household uses – food, clothing, transportation, housing, housing, furniture, education, and healthcare, for example. A household may be one person living alone, or a group of people living together who pool their resources for food and other necessities.

The extent to which the cost of living of a household changes depends on the make-up of its ‘basket’. So, although the average level of price increase for the overall economy may be a particular figure, say 10 per cent, how much more it costs a household to buy the same amount of goods and services as before may be equal to, less than or more than 10 per cent.

Additionally, you have no doubt noticed that the rate at which prices increase tends to vary by regions, so prices may increase more in some areas than in others. Ultimately, how much it costs a household to live is a function of the choices that it makes.

Rising prices reduce spending power and thus the standard of living. When the cost of living increases, households must spend more to maintain their living standard or maintain their level of spending and experience a decline in their living standard. If households are to maintain their purchasing power, they must be aware of the rate at which the prices of the goods and services in their ‘basket’ is changing.

Governments and the monetary authorities may do what they can to put a lid on rising prices and thereby on the cost of living. Possible actions include the hiking of interest rates to reduce demand, but it is possible that higher interest rates may lead to higher costs of production for producers who depend on debt financing, thereby leading to higher prices to the consumer.

Another available option is taking action to protect the value of the local currency against foreign currencies, so that the price of imported goods and services does not increase because of depreciation of the value of the local currency.

Individuals would note that rising prices do more than affect the cost of living and their immediate savings and consumption practices. Providing for the long term, for example, for retirement, can ultimately be affected, as can the achievement of other goals.

For their part, households may continue to buy the same ‘basket’ of goods and services by earning more, or by reducing their savings and possibly how much they invest. Additionally, they may try to increase their investment returns or modify their investment programme by prioritising instruments that have the potential to generate yields that are more in line with inflation. One consequence of such a strategy is that income may be sacrificed for capital appreciation.

There are several actions that each individual can take to cushion the increasing cost of living. Some are more suitable for some people than for others, and some will require the investment of more time.

Making an adjustment to the budget is one action to take. Where there is none, now is a good time to get into the habit of making one and being guided by it. Establish clear priorities and eliminate or reduce discretionary spending such as entertainment. Manage more tightly variable expenses such as food and utilities. Cut out waste. Do not buy what you do not need, and generate income by selling, if possible, what you own but do not need.

Comparison shopping is another. Shop around. This may require time or increased use of the telephone, but consider the savings that may result. Look out for specials, and combine your orders with friends and families if you can benefit from bulk discounts.

Produce what you can. The gospel of using up the backyard for gardening has been ringing in our ears for quite some time. It has health benefits too.

Be frugal, not cheap. Buy items that are of reasonable quality so they can last. Avoid the real cheap stuff which becomes useless before you get used to it.

On the financial side, refinance your debt for lower-cost debt if possible. Avoid expensive debt, credit card debt especially. Maintain your level of savings and avoid high-risk ventures.

This is not a set of magic potions, but suggestions which should make it easier to cope with the rising cost of living.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com