Oran A Hall | Inflation is a thief

Inflation is a thief: it steals purchasing power, it steals the value of interest on savings accounts, it steals the value of some forms of investment income, and it steals living standards. It does greater harm to those less able to protect themselves against it. No wonder central banks make gallant efforts to arrest it.

Inflation is the sustained increase in the general level of the prices of the goods and services that households consume. As prices increase, each dollar buys less, so wages and salaries, savings and fixed incomes buy less, effectively meaning that they lose real value over time. Inflation is deceptive because it is not always readily noticeable that the same sum of money is buying less.

Some level of inflation is desirable in a healthy and growing economy, but it is harmful when prices rise too sharply and over a long time. It is understandable that Jamaican consumers are concerned about the thief: the annual point-to-point inflation rate from August 2025 to August 2026 was 7.90 per cent, due largely to higher prices for food, transportation and fuel-related costs, a far cry from the Bank of Jamaica’s target range of 4 per cent to 6 per cent for 2026.

The inflation rate is measured by changes in the prices of goods and services in a representative basket of goods and services used by households, and which are weighted; but all households are not affected to the same degree because each household has its own unique basket, which reflects its own priorities. Thus, when the national inflation rate is 7.90 per cent, which is an average rate, one household may experience a rate of 4 per cent and another a rate of 8 per cent, based on their unique baskets and the weight of each item in their baskets. Each household, regardless of size, has its experience with the thief.

One way by which inflation steals is by reducing the purchasing power of consumers. In other words, it makes each dollar buy less, or makes the consumer pay more for the same amount of goods and services. Spending more to maintain the same level of consumption requires earning more income sufficient to meet the additional expense. The alternative is to withdraw funds from savings or investments, or to borrow, each of which carries the risk of compromising future well-being.

THE UNPROTECTED

Not all consumers are able to protect themselves from the thief.

People on fixed salaries are common victims. They must reduce their consumption of the goods and services that have increased in price, and it must be noted that the prices of some goods or services may increase marginally or significantly, or increase promptly or with a time lag. As an alternative to reducing consumption, they may choose cheaper alternatives. The real big challenge for this group is surviving if the items that rank highest in their basket rank among those whose prices have increased the most.

Fixed salaries do not mean that they are never adjusted. Adjustments can only help if they are at a rate that is equal to or higher than the rate of inflation.

Pensioners are often hit hard by the thief. There are several reasons for their situation. In many cases, pensions are fixed, although some have an adjustment mechanism which allows for periodic adjustments. The fact that their healthcare expenses tend to be high and that elder-care expenses sometimes have to be incurred makes retirees less able to protect themselves against rising prices.

It is quite easy to delude oneself into believing that one’s financial situation is improving because of the interest that savings are earning. Today’s reality is that such rates do not come near the inflation rate. Bonds are a better bet, but the interest they pay often falls short of the rate of inflation. In real terms, then, the bondholder is also a victim of the thief, particularly if it is a fixed-rate bond. Variable-rate bondholders stand a better chance. In all these cases, the gap between the inflation rate and the interest rate widens if the interest is taxable.

The impact of inflation goes beyond the interest that bonds and savings accounts earn. It affects the principal itself because it erodes its purchasing power. Although the nominal value remains the same, the real value, that is, the value adjusted for inflation, is not the same. The higher the rate of inflation, the lower the real value and the less it can buy.

Higher prices also steal from a person’s standard of living. They can affect how a person eats, lives and travels, for example. The best way to maintain a lifestyle is to increase net income at or above the level of inflation.

A common tool that central banks use to control inflation is high interest rates. While this may reduce demand and cause some correction in the case of demand-pull inflation, higher interest rates tend to have several negative effects, such as higher interest costs for mortgages, personal loans, credit card balances and consumer loans, hardly helpful to the consumer. Although those in a position to earn interest are able to earn more, it is not necessarily enough to compensate for the higher prices stemming from inflation.

Inflation is a thief because it quietly erodes the value of our money and impairs our ability to realise our financial goals. We can respond by being alert to price changes, using realistic and up-to-date budgets, reducing waste, avoiding unnecessary debt, switching to cheaper substitutes, shopping by comparison, strengthening our income, where possible, and making wise savings and investment decisions. We are not able to stop inflation, but we can limit how much it steals from us.

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