“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair” – Sam Ewing. This nice take perfectly sums up the consequences of inflation.
In your lifetime, you might have stumbled on a sum of money your parents or grandparents have saved up. To them, that sum of money could have been a month’s worth of salary and could cover groceries for up to three months. To you, now, with that same sum of money could be spent to dine out with your family one evening. The difference in how many things you can buy with a sum of money is the result of inflation.
Definition
Inflation is the decrease in purchasing power of a currency hence a general increase in the goods and services price level within an economy.
Why does inflation happen
Cost-push inflation
Inflation can be caused by a rise in the cost of resources and wages. This would limit the aggregate supply in an economy, causing not only inflation but stagflation.
Demand-pull inflation
This is a more common cause of inflation. The decrease in purchasing power comes from the general increase in aggregate demand. Governments normally facilitate this by using expansionary policy in order to achieve higher GDP and economic growth. They try to limit unemployment by providing jobs. As workers have more money, they will spend more, increasing aggregate demand.
Who benefits from inflation?
It might be counterintuitive, but there is one specific group of people that can benefit from inflation. This group will be the borrowers. If you borrow $100 from your friend today, you can afford $100 worth of goods. However, when you pay them back in the future, accounting for inflation, the initial $100 will probably only buy $90 worth of goods.
How to minimise the effects of inflation
The worst thing one can do to fight against inflation is to leave your money stagnant. This is the only guaranteed way that you will lose money over time.
Instead, do your research and put your money to work. To beat inflation, the rate of growth of your investment should be higher than the rate of inflation. Popular investment choices to beat inflation today are appreciable assets such as property or cryptocurrencies.
If you have time, you can invest your time and money into trading: forex, crypto, NFTs.
Final words
Inflation is slowly taking our wealth away. Being educated about it and coming up with a suitable action plan to put your money to work is the first step to minimising its potential effects. Whatever you do, do not leave your money idle!
