Exploring inflation: what is it and how does it affect your wallet

Inflation affects the cost of everyday items. Learn what it is, how to calculate it and how to best protect your wallet against its impact.
inflation in simple terms

Are you aware of the economic phenomenon that can dramatically impact your wallet? Have you ever heard of the term inflation? How does it affect our life and what is it?

Inflation is an economic phenomenon that directly impacts our day-to-day decisions. It refers to an increase in the overall price level for goods and services over time.

It can have a significant impact on the prices of goods and services. It’s important to understand what Inflation is, how it’s calculated, and the effects it can have on your pocketbook.

Definition of inflation in simple terms

In simple terms, it is an increase in the general price level for goods and services, which can be seen over a period of time. As prices go up, every dollar you have buys less than it did before. 

To understand this phenomenon better, let us take an example. Let us assume that the price of a pair of shoes was $50 in January and had increased to $60 by July due to inflation. This means that you will have to pay more for the same product six months later, as the general prices for goods and services have increased. 

Types of inflation 

Demand-pull, cost-push, and built-in are the three basic forms of inflation.

  1. Demand-pull inflation: when there is a strong demand for a product or service, prices rise as a result. When the demand for certain goods or services exceeds the supply, the prices of those products naturally increase;

  1. Cost-push inflation: this kind of inflation is brought on by a rise in the production price of goods. An example of this could be when companies have to pay more for raw materials such as oil and gas, which can lead to an increase in the price of goods and services produced by them;

  1. Built-in inflation: this is a sort of inflation that happens when there is a general expectation of inflation in the economy, which may result in higher prices. It happens when businesses and consumers anticipate that prices will increase and adjust their prices accordingly. 

How to calculate inflation

Inflation is usually measured using a consumer price index (CPI). The CPI is a measure of the cost that people incur to meet their basic necessities since it represents the average price of a basket of goods and services. It measures the overall change in prices over time, allowing economists to calculate it.

Inflation is calculated by comparing the CPI from one month to the next. The difference between the two numbers results in a percentage change that indicates how much inflation has occurred. This figure is used as an indicator of overall economic activity and growth. 

Effects of inflation 

There are many different ways that inflation may affect people, businesses, and the economy overall:

  1. increase in prices: as prices increase, goods and services become more expensive. This means it may take more money to purchase the same items than previously. This can be especially difficult for those on fixed incomes, as their income may not keep up with the rising prices;

  1. decrease in purchasing power: it also reduces an individual’s purchasing power. This happens when money is worth less than it used to be due to the increased prices of goods and services. As a result, people may not be able to buy as much with their money as they could before;

  1. increased uncertainty and volatility: it can also lead to increased uncertainty and volatility in the economy. This is because it’s difficult to predict how prices will change over time. As a result, businesses have difficulty planning for the future, and consumers may be wary of making big purchases

Strategies for coping with inflation 

Inflation can have a significant impact on an individual’s finances, but there are some strategies that can help you cope with the effects of it. 

  1. utilize long-term investments: one way to cope with it is to invest in long-term investments. These include stocks, bonds, and real estate. By investing in these types of assets, you can benefit from their growth over time and protect your purchasing power against inflation;

  1. adjust spending habits accordingly: this may include making changes to your budget and looking for ways to save money. Additionally, you may want to consider switching to more cost-effective alternatives for some of your purchases;

  1. monitor cost of goods regularly: You should also make sure to monitor the cost of goods regularly. This will help you stay on top of price fluctuations and adjust your budget accordingly. 

The cost of products and services and an individual’s purchasing power can be significantly impacted by inflation. It’s important to understand how it is calculated and the effects it can have on your pocketbook. 

You may fortunately utilise certain coping mechanisms to deal with the consequences of it. By utilizing long-term investments, adjusting your spending habits accordingly, and regularly monitoring the cost of goods, you can defend yourself against inflation’s impacts.

Read also: Regulated and unregulated markets: what they are and their differences

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