“Have you ever noticed that bread at the supermarket costs more today than it did a few years ago?”
Well, this is due to Inflation, which can be defined as a general and prolonged increase in the prices of goods and services over time, reducing the purchasing power of money.
Below, I will answer some questions that will help me explain the basic concepts of this topic.
(Read the whole article, at the end I have a quiz for you.)
I Why does inflation happen?
For three main reasons:
- Law of Supply & Demand
If demand grows faster than supply, prices rise.
- Production costs
If energy, raw materials, or wages increase, companies raise prices.
- Monetary policy
If there is too much money in circulation (central banks print more money), the value of the currency decreases.
A concrete example is the price of gasoline, which rises when demand for oil increases.
II How is inflation measured?
Through the Consumer Price Index (CPI).
This is a basket of goods (bread, milk, gasoline, rent, clothing).
When we hear on television that the inflation rate has risen by +2%, it means that, on average, prices have increased by 2% compared to the previous year.
[Further reading: ‘Good’ inflation and ‘bad’ inflation]
Inflation is not always a sign of a bad economy.
And I can hear you thinking: ‘But Edward, you've written a lot saying that it's the reason I have less money in my wallet’.
I agree with you, but let me explain why it is not always negative.
If it is:
Moderate (2%), it is a sign of a healthy economy, consumption, and growth.
Too high (10% or more), it is a sign of insufficient wages and a crisis of confidence.
Too low (deflation), it is a sign that consumers are postponing purchases and the economy is slowing down.
III Who controls inflation?
Unfortunately, it is currently regulated by central banks (ECB, Federal Reserve). I say unfortunately because we all know (((who))) runs the big banks and big funds.
However, the mechanism for managing inflation is simple. They raise interest rates to cool the economy, which results in more expensive loans, less spending, and slower price increases.
They lower rates if inflation is too low.
IIII What are the practical effects on the economy and daily life?
Mortgages and loans: installments go up when rates rise.
Savings: money in the bank loses real value.
Salaries: if they do not increase, purchasing power falls.
International markets: inflation in the US or Europe affects exchange rates and global trade.
In short, inflation is not just a number; it affects all of us in our daily lives.
And now here we are for the quiz question.
I will leave you with this to see if you have understood what I have written or not.
“Is it better to have slightly high inflation or too low inflation?”
I pray that all Zevists will prosper.
- Edward666
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