The Cost of Living – From Crisis Starter to Hedging Solution

The cost of living crisis is accentuating and spreading, affecting even previously strong economies. However, this is not a newly discovered issue; as history shows, elevated living costs have plagued the masses.

That raises a few questions. Why don’t we have efficient solutions to predict and stop such situations? And what can we, as consumers, do to keep our savings safe and maintain our purchasing power?

Factors Affecting the Cost of Living

A number of factors are involved in determining the cost of living: the overall household budget, the location, the prices of monthly necessities, and taxes. As such, it varies with state and even from one city to another.

Areas with higher incomes also have higher costs for basic necessities. But at this point, an increased cost of living is experienced at a global level because of a series of triggers:

• The pandemic, followed by the conflict in Ukraine, severely impacted petrol and energy prices.
• Everyday goods became increasingly expensive as manufacturers started to have trouble covering the increased demand during the pandemic, especially once the prices of some materials went through the roof.
• Transport issues. First, shipping companies had problems covering the increased demand during the pandemic, especially with ports in China functioning at a reduced capacity. Then, the war in Ukraine affected supply chains.
• Signing-on bonuses that were necessary for filling roles after the pandemic led to higher wages that turned into additional costs for consumers.
• Harvests are affected by weather.
• Fed rate hikes.
• Prices and wages boost each other and get dangerously close to a wage-price spiral.

All these factors have basically created the perfect storm for a cost of living that many consumers’ wages and savings cannot handle.

Previous Crises

Indeed, such situations have happened before.

In the mid-1940s, there was a sudden shift from services to goods, leading to high and sudden inflation. A similar shift happened during the Covid-19 pandemic, as people stopped going out and instead focused on ordering goods at home.

The problem in situations like these appears when a price shift doesn’t accompany the shift in demand. Despite expectations, services don’t become cheaper, and, at the same time, goods become more expensive. That causes inflation and lower purchasing power.

Then, in 1970, the wage-price spiral aggravated the crisis. In the UK, trade unions used their bargaining powers to push wages up. But increased wages became increased costs for consumers. And that happened while oil prices were already rising, resulting in a deep inflation crisis.

A similar scenario happened in the US as well. Domestic inflation, paired with OPEC raising the price of oil and wage increases, created a massive problem. President Nixon opted for a monetary policy with a price freeze to break the spiral and control inflation. However, the effect wasn’t that impressive.

Then there was the more recent financial crisis of 2008. The severe recession was experienced worldwide, and the recovery was slow and highly challenging. This time, inflation was caused by a sudden decline in the residential construction sector and the related crisis of mortgage-related products.

But the entire market ended up feeling the shock.

Regardless of what caused the inflation, all these crises have one thing in common: consumers facing the cost of living struggle, especially workers trying to survive on a minimum wage.

Minimum Wage vs. Living Wage

This is a very important distinction, especially during periods of high costs and wages that struggle to keep up with the changes.

Unfortunately, it is becoming increasingly apparent that the lowest wage an employer can pay an employee and the minimum amount that an employee needs to cover the basic cost of living are very different.

The federal minimum wage has stagnated since 2009. So following the great recession of 2008, federal officials considered the $7.25 per hour wage appropriate.

The Economic Policy Institute, on the other hand, found that the current minimum wage, adjusted for inflation, is at its lowest since 1956.

Since the federal minimum wage doesn’t consider the subsistence level for a region or household size, change had to happen locally. So in 2023, almost half of US states increased their minimum wage.

Even so, many households continued to struggle, especially once inflation created one more crisis. One reason may be the lack of a valid and official living wage measure that considers all basic needs.

Failing to Prevent and Manage

Cost-of-living crises keep happening, and their impact doesn’t seem lower with each new event. So analyzing what needs to change in terms of strategies for prevention and management may be necessary.

One recurrent mistake is considering these problems short-term and low-intensity problems and expecting them to ease without intervention. This has proved to be a faulty outlook many times in the past.

The strategy would need to consider many factors. On the one hand, the temporary issues like the pandemic, Brexit, or the conflict in Ukraine. On the other hand, many deep, long-term issues negatively contribute to inequality, environmental problems, and a steady deterioration of global productivity and even GDP per capita.

Overall, the global economy has been on a descending path since 1978 – considered the best year the world’s economy has experienced. Some consider that a possible cause for the decay is the fact that what has been seen as growth has been, in fact, resources being reallocated from the working force to shareholders.

Another crucial factor is the alarming rhythm of accumulating debt. This has become particularly evident lately with all the debt ceiling arrangement debates. Not to mention that apart from the staggering financial debt, it would also be essential to consider the matter of overusing natural resources, thus creating an ecological debt that may be even harder to manage.

Even though experts have been making predictions in this direction for a while now, a measure has yet to be taken to make basic expenses affordable again. And maintain that affordability in time.

As for managing the crisis once it has already set, a quick look at the daily economic news paints a vivid picture. Instead of the current chaos, what should we witness?

Firstly, the recognition that all these successive rate hikes will have long-term consequences that the economy and the people will struggle to overcome. And each hike should be preceded by a complex analysis of all its implications. Ripple effects, in situations like these, can be malignant.

At the same time, preventive measures are also necessary. Infrastructure changes are needed to sustain the recovery and for the following challenging periods. Successfully deploying the Inflation Reduction Act is a crucial step. For instance, ensuring a larger supply of green energy would be a great way of avoiding future volatility.

Is Hedging against Inflation Actually Possible?

The cost of living clearly is a recurring crisis that inflicts severe damage on the most vulnerable categories. And unfortunately, authorities lack solutions for avoiding and surpassing such crises.

So the only logical solution is relying on an inflation hedge that actually works – a currency pegged to the cost of living.

This has been the goal driving the creation of Nuon: creating an asset that can resist inflation. This way, holding Nuon becomes synonymous with maintaining purchasing power.

Crises like the one the world is still experiencing should be prevented or at least detected early on and managed efficiently. However, in the less-than-ideal reality, it’s up to each consumer to find a way to afford their regular consumption habits and needs with their income regardless of inflation movements.

Fortunately, this is now a real possibility.