Your living cost is largely dependent on two variables: your income and market prices. Technically, the cost of living applies to your basic needs, not your wants.

As day-to-day costs increase, inflation occurs. A mismatch in the supply-demand relationship induces inflation.

When growing numbers of individuals compete to purchase a small number of products, prices inflate. These high rates will only get higher, eroding finances and spending capacity.

Why the cost of living keeps rising

Inflation is the number of price increases over a given period. Usually, inflation is a broad metric, such as the average increase in prices or the rise in a country’s cost of living.

But it can also be measured more narrowly such as in the prices of food, or services such as school tuition.

Inflation defines how much more costly the relevant collection of products and/or services has become for a certain duration, most frequently in a year, regardless of the context.

What creates inflation

Long-lasting, high-inflation periods are often the product of weak monetary policies.

If the supply of money rises so much compared to the size of an economy, the currency’s unit value decreases; in other words, its buying power falls and prices rise.

This relationship between the production of money and the size of the economy is called the money theory of quantity and is one of the most ancient economic theories.

Pressures may also be inflationary on the supply or demand side of the economy.

Supply disruptions that interrupt production, such as natural disasters, or an increase in the cost of production, such as high oil prices, can reduce overall supply and contribute to cost-push inflation, where price rises are caused by supply disruption.

In assessing inflation, expectations also play a crucial role.

If individuals or businesses expect higher costs, these expectations are incorporated into wage contracts or contractual price changes (such as automatic rent increases).

This behaviour partly dictates potential inflation; expectations become self-fulfilling until the contracts are exercised and there’s a decision on wages or price increase.

Inflation can follow similar trends over time, contributing to inflation stagnation, to the degree that individuals base their expectations on the recent past.

What you can do

Some re-adjustment of habits, if not a complete redesign, is required unless you have the financial cushion to withstand higher prices.

Habits are ingrained actions. In the long term, habits and overcoming inflation go hand-in-hand.

Higher prices are here to stay, and it is most likely that prices will rise at a faster rate. Battling inflation, in other words, is a never-ending effort.

1. Manage your desires

The human emotions of jealousy and desire are played up by brand-driven organisations who use celebrities and social influencers to tempt you.

These vulnerabilities are enabled when you covet what others have but remember, while flaunting happiness may be real, the harm to your finances is real too. Best to learn how to balance your impulses and control your jealousy.

2. Prioritise saving over spending

Do you invest first and save what’s left? Or do you save first and spend what’s left?

If you spend first when you know there’s very left in the kitty, you’ll suffer for it later. Why not invest first and manage your expenses so you have a cushion to fall back on in times of low income or no income.

Balancing your current spending with future spending is difficult, especially if your level of spending is as high, if not higher, than your level of income.

The future could be one second from now – a sudden fall, an illness, a call for support from a loved one, all of which needs a strong financial buffer.

3. Build an emergency fund

Ask those seeking medical treatment in the accident and emergency department if they expected to be there. Most, if not all, would say no.

Some emergencies are too big to save up for. Normally, they are beyond an average person’s financial capacity to cope.

In addition to medical treatment for major diseases and injuries, loss of property, professional and personal liability are some primary risks that you may inadvertently take on if they are not covered for.

To retain emergency funds, use insurance intelligently. The danger of coughing up a huge amount of cash is passed to the insurance industry so that you have enough money to deal with inflation.

4. Seek financial advice

Unit trusts, daily savings accounts, pensions, private retirement scheme… these can be confusing. But don’t be intimidated by these ambiguous titles.

The world of financial goods is also treacherous – full of landmines to the uninformed. Your best bet is to consult daily with a financial advisor to figure these out.

A financial advisor knows where to tread and how to steer you out of the muddy waters, aside from being able to integrate inflation into your financial plans.

Retirement must, for instance, be funded so prepare for it early. It’s risky to rely solely on your EPF, as withdrawals for the education of your children, medical care and housing loans would take their toll on your EPF balance.

Poverty during your old age is a real possibility if procrastination, coupled with inflation, unexpected medical expenses and an unexpected change in wages become factors.

This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.