Navigate Inflation & Protect Your Practice
Inflation is literally the inflation of the money supply > reduction in purchasing power of currency, therefore higher prices.
When there is an excessive increase in the money supply, such as through the printing of money, it leads to inflationary pressures.
The current inflationary pressures are characterised by a significant contribution from supply-side factors. For example, rising energy prices, increased food prices, and higher costs of building materials are driven by the actions of certain market participants. These factors can result in higher prices for consumers.
The concern arises when central banks respond to inflation further by raising interest rates, as this can increase strain individuals and businesses who are already facing the burden of rising prices.
In terms of the value of currencies like the pound or the dollar, they are no longer backed by a physical asset like gold. Instead, their value is based on the trust and confidence people have in the economy and the government that issues the currency. This is often referred to as fiat currency.
The value of a currency can fluctuate based on various factors, including economic conditions, interest rates, and perceptions of stability.
While barter systems can be used for direct exchanges of goods and services, they can be challenging to scale and can lack the convenience of using a standardised currency.
There is a psychological aspect to inflation. The perception and expectation of inflation can influence people's behaviour. If individuals anticipate rising prices, they may seek pay raises or increase their own prices to protect their interests. This collective mindset can contribute to a self-fulfilling prophecy, further fuelling inflationary pressures.
It is worth noting that inflation can have both positive and negative effects depending on the context. For instance, in the realm of property, inflation can benefit those who have purchased assets with debt, as the increased value of the assets can help inflate away the debt over time.
Protect Your Practice
Regarding inflation, Richard discusses various strategies practice owners can employ to mitigate its impact. The most vital is making sure you initially know your numbers and where you are profitable. Decisions can then be made rationally based on fact rather than fear and emotion.