In English: Inflation doesn’t treat our wallets equally

INFLATION DOESN’T TREAT OUR WALLETS EQUALLY

TEXT Roosa Sarajärvi TRANSLATION Henna Kaaresto ILLUSTRATION Viima Iivonen

Quick showers, possible power outages and tempting evening sales… Inflation’s reach goes far and wide. The term refers to a general increase in prices and a fall in the purchasing value of money. In everyday life, inflation can be noticed at the store checkout, as familiar products suddenly cost more than usual.

In Finland, total inflation is most visible as an increase in the prices of energy, fuel and food, but it also affects public transportation fares and the total sum in your restaurant bill.

The last inflation that considerably shook up Finland’s economy occurred in 2008. It was caused by a variety of issues, such as high prices of oil and housing, global currency depreciation, and a crisis in the financial sector. The currently occurring inflation has resulted from the post-pandemic economic recovery, food production issues, and Russia’s invasion of Ukraine. According to Jaakko Simonen, economist from the University of Oulu, the situation is atypical.

“Typically inflation is kicked off by a booming economy. In such a case, the European Central Bank would raise key interest rates in order to keep inflation within the limits of the goals, which has an effect on, for example, mortgages. However, we are currently in a situation in which the economic prospects are rather weak, but inflation remains high regardless.”

Economic instability directly reflects upon people’s trust. Since 1995, Statistics Finland has surveyed people’s trust in their personal finances, Finland’s economy, households’ saving possibilities, and unemployment. In March 2022, the trust indicator’s result was -10,5, the weakest since December 2008.

“People’s trust in their personal finances is the lowest it’s been in a long time, despite decreased unemployment rate. If this is truly the case and people are too afraid to make large investments on things such as vehicles or home appliances, it could ultimately affect employment rates as well”, Simonen states.

Budgeting leads to considerable savings Inflation doesn’t treat everyone equally. Someone living in a multi-person household in the countryside while using electricity or oil to heat up their detached house, driving their own car and using the city’s services infrequently may feel the effects of inflation heavily. Meanwhile, someone else living in a district-heated rental flat in the heart of the city while using a bicycle and public transportation to get around and frequently utilising the city’s services in their everyday life may feel the effects of inflation on a much smaller scale.

How is inflation visible in the life of a student? Noora Nahkala, 22, a Bachelor of Science and first-year psychology student, identifies the effects of inflation the strongest while shopping for groceries. Nahkala and her partner share their everyday expenses somewhat equally. Nahkala’s own income consists of the study grant, student loan and general housing allowance.

“Nowadays we tend to skip some small luxuries such as blue cheese or fruit juice. It’s rare that we make any special foods, such as tortillas, or order take-away. We try to favour normal, good food and buy lots of groceries at one time”, Nahkala explains.

Nahkala feels that more conscious consumption has kept her household’s grocery expenses somewhat the same as before. “But if you compare last year’s prices of basic needs to what they are now, the difference is certainly large. If it used to cost 100 euros to buy groceries for one week, today it feels like a large sum because everything else is getting more expensive as well”, Nahkala ponders.

However, small planning can lead to considerable savings. Nahkala recommends comparing prices per kilogram, favouring recycling and utilising surplus food services. “It’s also good to think about what you buy and from where. Sometimes it may feel tempting to pick up small groceries from the nearby store, but if you put in some effort to get a larger amount of groceries from further away, the planning will most likely pay itself back.”

She also encourages to recognise the things that are really important while sacrificing some other things that may not be as fulfilling or essential. “For me, my hobbies such as floorball and handicrafts are important things that improve my mental health and bring good counterbalance to studies. I also would not be willing to give up my pet, despite the expenses.”

Instead, it’s easier to save constant shopping and some cultural experiences for later.

“Earlier in the Autumn I also gave up my car, which I had needed for my summer job, due to increased gas prices and the diesel tax for an older car amounting to around two euros per day. Nowadays I get around by cycling and via public transportation”, Nahkala says.

Student loan remains a safe option With increased interest rates, students may be concerned about whether it’s even safe to take out a student loan in these times. Jaakko Simonen deems the concern understandable, but sees no threat in taking out the loan. “You shouldn’t be scared of taking out a student loan, as I don’t see any considerable changes in the horizon for student loan interest rates. As a student, I would rather consider whether to work to finance my studies or to take out the student loan and advance my studies swiftly. From the point of view of teaching, we of course wish for students to study diligently and graduate on time.”

In Simonen’s view, students are a part of the group that inflation has the least effect on.

“Students don’t need to be particularly worried about inflation, but there may be concerns about the causes behind inflation, and the future as a whole in regards to economic development. Even in this case, I want to stress that the ageing of the population ensures that there will be employment opportunities in the future as well, however perhaps not in everyone’s dream career field.”

In July 2022, the Parliament of Finland ruled an extra 3,5 % index increase for social security benefits, which led to an increase in the majority of Kela benefits tied to the national pension index. In addition to the national pension, these benefits included the unemployment benefit, the basic unemployment allowance and the labour market subsidy, but not, e.g., the child benefit or the general housing allowance.

The study grant for students was increased by 5,7 %, as an extra index adjustment was acknowledged during the regular adjustment that is conducted at the beginning of each academic year. In practice, this means that while the monthly study grant previously amounted to 253,69 euros, students will now receive extra 14,54 euros at least until next July.

The change is not very noticeable in students’ wallets, as the increase in food prices also led to an increase in student meal prices from the beginning of October. The maximum price of a student meal increased by 50 cents, so students are now paying a maximum of 3,20 euros per meal. This means an increase of approximately 10 euros in the monthly expenses of a student who purchases a student lunch every weekday. “As a student, I feel moderately secure even though my income is not increasing alongside my expenses. The student loan is essential for me, as I am left with less than 200 euros after paying the rent”, Nahkala states.

Although the crises of the recent years have sparked concern, Nahkala has decided to approach inflation with a realistic and relaxed attitude, even though the consequences feel a bit frightening.

“I see inflation as a natural event just like many other phenomena occurring in cycles. On the other hand though, until now inflation has felt quite distant and something that is only discussed during history and social studies classes in school”, Nahkala ponders. Inflation alters buying behavior A lot of research has been conducted on humans’ resilience from a psychological point of view, but Jaakko Simonen and his co-researcher have approached the topic from an economic point of view. They are studying the definition of resilience, its occurrence in economics literature, how resilient humans deem themselves and other things.

“In times of crisis, the changes in people’s economic behaviour are ultimately visible in how we consume, what we consume, and how we prepare for the future”, Simonen explains.

He encourages everyone to take a moment to examine their personal budget. “All of us aim to make good choices within the limits of our budgets. Changes in prices typically cause us to make changes in our buying behaviour, which is when it’s good to stop and observe, think about and foresee our decisions according to our personal financial situations.”

According to the European Central Bank, inflation will not be considerably slowing down until 2024. What should we look out for before that?

“It’s always difficult to predict the future, but it’s been estimated that we will still be seeing increases in food prices towards the end of 2022. This results from the increase in food and supply chain prices”, Simonen states.

Prices of electricity will also most likely reach their peak in the coming months, whereas a slight decrease may occur in early 2023. However, Simonen believes that the prices of fuel will remain relatively stable. •

PEOPLE’S TRUST IN THEIR PERSONAL FINANCES IS THE LOWEST IT’S BEEN IN A LONG TIME, DESPITE DECREASED UNEMPLOYMENT RATE. IF THIS IS TRULY THE CASE AND PEOPLE ARE TOO AFRAID TO MAKE LARGE INVESTMENTS ON THINGS SUCH AS VEHICLES OR HOME APPLIANCES, IT COULD ULTIMATELY AFFECT EMPLOYMENT RATES AS WELL. INFLATION BRIEFLY

• Means a fall in the purchasing value of money • Typically results from quick economic growth • Measured with different price indexes, most typically with the annual consumer price index • The consumer price index, or basket of goods and services, consists of 480 goods and services consumed by households • According to Eurostat, in August the inflation rate in the euro area averaged to 9,1 % and in Finland 7,6 %, • For support and advice in personal financial management, contact for instance BusinessAsema (every other Thursday 1 p.m. - 4 p.m.) and Takuusäätiö (www.takuusaatio.fi).