What is inflation and how it affects me?

Inflation and increasing prices

Inflation refers to the rate at which a set of goods becomes more expensive over time, typically a year. This might be the most famous expression in economics. Inflation has led to prolonged instability in many countries. Inflation describes the rate at which prices rise over a given time. Inflation is often a broad indicator, such as an increase or decrease in the cost of living. However, it can be calculated narrower for certain goods and services. No matter what context, inflation indicates how much goods or services are becoming more expensive. Consumers’ cost of living is affected by the prices of various goods and services and each part of the household budget. Government agencies carry out household surveys to measure the cost of living for average consumers. They identify the most commonly bought goods and track the costs over time.

What causes inflation?

When the money supply is too high relative to the size and growth of the economy, then the value of the currency units decreases. Meaning that its purchasing power declines and prices rise. You can’t get anything for nothing, but casino games aren’t subject to inflation. This relationship between the money supply, the economy’s size, and money quantity theory is one the oldest hypotheses of economics.

Inflation can also result from pressures on the supply and demand sides of an economy. Supply shocks such as natural disasters and high oil prices can cause disruptions in production. They also increase production costs. In this case, inflation is called ‘cost pressure.’ The incentive to raise prices comes from supply disruptions. The resulting resource burden can lead to ‘growth of demand’ inflation if the increase in demand is greater than the economy’s productive capacity. Without reassessing the economy, policymakers need to strike the right balance between growth and increasing demand. Inflation can’t be caused by reassessing the economy. When people or companies expect higher prices, they include this expectation in negotiating wage adjustments and price adjustments in contracts (such as automatic rental increases). This is how inflation will be determined for the next period. When contracts are completed and wages or prices rise according to the agreement, expectations can become self-fulfilling.

Price rises have the following consequences

As of now, their nominal income in current money won’t increase as fast as their prices. This is a problem because they cannot afford to buy as much. Their purchasing power is declining, and real, inflation-adjusted income is decreasing. Real income cannot replace living standards. Living standards rise as real incomes rise. Prices change at different rates. The prices of trade goods, for example, change daily; other factors, such as contractual wages, take longer to adjust (or remain sticky in economic terminology). In an inflationary world, consumers’ purchasing power is affected by unevenly rising prices. The single largest cost of inflation is a decline in real incomes.