19SEPT - OCT 2023MANAGING PRIVATE FINANCES DURING THE ECONOMIC TURMOILBy Tomasz Serwan, Investment Director, Alior BankIn our conversations with friends or family, the topic of rising prices has been coming up increasingly common for some time. More and more often, everyday shopping becomes a challenge and saving money requires sacrifices. High inflation is clearly an anomaly for us. For the European Union, an inflation rate above 10 percent has happened for the first time in history. Of course some European countries suffered from high inflation rates during the energy crisis in the 70's or as a result of structural changes, but most people of working age don't remember those times. We are now facing accelerating inflation for the first time in the modern economy.As a traditional solution for high inflation, central banks increase interest rates. High interest rates are also something new, because for over 10 years they were close to zero and cheap capital was the fuel for economic growth. When we look closely at the data, we can see that over the last couple of years, we experienced negative real interest rates. This happens when interest rates (often even including the bank's margin) are lower than the inflation rate. What does this mean in practice? It means that if we borrow money from the bank and spend it right away on our future needs we act reasonably, because the cost of capital is lower than the difference between the current and a future price. Of course inflation rate is a weighted average based on a number of products, but we can assume that for most of the goods the above statement is true. It is a strong economic booster, but it has its limits.Tomasz SerwanCXOINSIGHTS
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