Inflation is a term that’s thrown around quite often in the news. But what does it mean, and why should you care? Inflation, simply put, is when prices for goods and services increase over time. You might be thinking, “I can’t afford to buy anything anyway,” but inflation also affects your borrowing power. If you’re not careful, it could lead to unmanageable debt or bankruptcy. This blog post will explain how inflation works and show you some ways to help protect yourself from its harmful effects!
What is inflation?
Inflation is when the overall cost of goods and services increases in price. In other words, inflation means your money buys less each year because prices increase for all types of goods. For example, say you purchased a breadstick at Subway in 2016 for $0.75, while today it costs $0.90 to buy that same breadstick. Although fifteen extra pennies may not seem like much, this small amount adds up over time and leads to significant losses if not accounted for by an investment portfolio or financial plan.
Another type of inflation is cost-push inflation, which occurs when there are increases in the price of inputs or resources necessary for a business to stay afloat. For instance, if oil prices increase dramatically and companies pay more for gas, it will drive up their costs. As a result, they can either absorb themselves by cutting into profits or pass onto consumers through higher-priced goods and services.
Demand-pull inflation is the most common type of inflation that people are familiar with but has many drawbacks in its negative impact on individual consumers who may not keep up with rising prices due to lower incomes or fixed wages (i.e., minimum wage).
Furthermore, companies can only raise prices so much before consumers choose to buy from a competitor, which is why it’s crucial for companies that face inflationary pressures to have an effective pricing strategy in place.
Why does inflation matter?
Inflation matters because it is the most critical determinant of your purchasing power or how much you can buy with a dollar. If inflation were negative for 40 years, prices would decrease every year, and everyone’s money would be worth more–it’d go further! For example, say an investor held $100 in cash from 1970 to 2010, so they could purchase breadsticks at Subway over time instead of investing their dollars somewhere else.
In this case, that person may have been able to afford less than one breadstick per year because the price increased during that period while our investors just sat on their wallets. Ouch! This is why we must understand what causes inflation and how best to protect ourselves against its damaging effects:
It affects your purchasing power.
Breadstick prices are increasing over time. This affects the power of your money, which is essential for borrowers to understand. Borrowers need to know that they will have to pay back more cash than borrowed. Inflation is a part of why borrowers struggle with repayments or get into trouble due to not being able to afford their interest rates and loan terms.
This means that if an individual doesn’t have money, their lack of it affects how much they can buy with how little cash they may have saved up over time. The example used was someone who purchased Subway breadsticks for years and did not invest their dollars somewhere else to insure against losses due to inflation. At the same time, prices increased–this shows us how robust even small increases are when multiplied by many years!
This type of information is crucial for borrowers because it will help them better understand why student loans or other debts are difficult to repay, especially during periods where interest rates rise substantially. These types of debts are something that borrowers must consider when it comes to their finances.
Inflation affects food production costs and oil prices.
Both have a direct connection with how much you pay at the grocery store or gas pump. Knowing what matters most when it comes to inflation will help better inform financial decisions to protect yourself against potential losses due to the increased cost of goods and services associated with inflation.
Food and energy prices are the most volatile, but they’re also significant to understand because of their importance in the lives of every individual. If you don’t have money for food or gas, then your life will be negatively affected, which is why borrowers must learn about inflation so that they can better protect themselves against its potential damage.
Interest rates are higher.
Inflation rises every year as more money enters into circulation (the total amount of spent cash). As such, higher levels lead directly to increased interest rates paid by those borrowing (and holding debt), who must compensate lenders for their ‘lost purchasing power over time.
Inflation affects interest rates paid by those holding debt and investors who hold cash savings accounts because they need compensation for their loss of purchasing power over time.
How does inflation affect my wallet?
Inflation is when prices for goods and services increase over time. Of course, you must understand what this means in terms of your finances, so let’s take a look at the dollar’s purchasing power.
The price level has increased by 269% since 1913, which means everything costs nearly three times as much today compared with 100 years ago (as measured by the Consumer Price Index). That means your dollar doesn’t go as far today as it did in 1913, meaning that you can buy less with a fixed amount of money.
Inflation matters because it affects how much you pay for goods and services from year to year. These facts about inflation are simple enough, but understanding them will help shape financial decisions moving forward.
How can you measure the rate of inflation?
There are several ways to measure inflation, but the most common way is by measuring monthly changes in the Consumer Price Index (CPI). The CPI measures changes in the retail prices of a fixed basket of goods and services over time.
The U.S. Bureau of Labor Statistics determines this index monthly, which means that it captures how much inflation has occurred from one month to the next and year-over-year (a 12-month moving average). So when you hear about “rising” or “falling” inflation rates on TV, radio, or through other media outlets, they are usually referring to the latest monthly change in the CPI—in either direction!
Inflation represents a decline in purchasing power for money because each dollar can only buy a certain amount of goods and services now versus what it could have purchased before – meaning if you have fixed income. Still, prices go up; you can buy fewer goods and services.
One way to think about inflation is that the buying power goes down over time because prices rise. Another way to look at it is by thinking about how much less your salary could buy today than years ago—because prices have gone up. Thus, inflation results in an erosion of the purchasing power of your dollar.
Inflation is not a new concept; it’s been happening for centuries and has always existed to some degree, though inflation rates have varied over time. Economists measure inflation by finding out how much prices change between two points in time (e.g., “I paid $20 per gallon for gas in 2008, but $50 per gallon in 2012”).
Why do countries experience inflation differently?
Inflation is a phenomenon that happens in virtually every country worldwide, but it’s generally more pronounced in countries with less-stable currencies and poorer economic conditions. In these economies, inflation rates tend to rise much higher because high unemployment levels and political turmoil usually accompany them. For example, Argentina had an annual average inflation rate of more than 30% in 2013, while Venezuela experienced an average yearly rate above 60%.
The United States also has had its fair share of high rates over the years. It’s important to note that during World War I and for about a decade after it ended, the U.S. dollar was not tied to gold—and during that time, inflation levels reached as high as 20%. In the late 1960s and early 1970s, there was a period of very high inflation (about 14%) brought on by an increase in oil prices. This led to specific wage-price controls being implemented at this time.
Since then, U.S. inflation rates have generally remained low and stable…meaning that U.S. consumers have not had to worry about high inflation rates eroding their purchasing power over time, though it’s important to note that this is a phenomenon that can go up; as well as down!
Are there ways to reduce the effects of inflation on your finances?
A straightforward way to do this is by paying down your debts as quickly as possible. This will free up funds for other purposes, such as investing or saving for retirement. Inflation can also be reduced through adequate diversification of investments and a healthy mix between stocks and bonds.
Your best bet may be the combination you already have: owning an index fund that invests in a broad swath of the stock market, as well as purchasing U.S Treasuries or Treasury-indexed funds that provide some protection against inflation.
There are many ways to reduce your exposure to rising prices and interest rates on debt instruments through diversification. For example, suppose you’re planning for retirement. In that case, keeping all of your funds in an account with one institution exposes you to the risk of that company failing or falling into economic distress. Instead, a great way to diversify is by investing in index funds that spread your money across many companies and industries.
How should I invest during periods of high or low inflation rates?
During periods of high inflation, it’s essential to have a diversified portfolio that includes investments in bonds and other relatively low-risk securities, as well as stock funds. This will help you guard against the effects of inflation on your investment returns while still preserving your long-term capital growth potential. Conversely, when there is deflation or disinflation, you may want to move your portfolio toward investments with a more aggressive risk profile.
There are many ways for investors to diversify their holdings and reduce the impact of inflation on returns during high or low periods. For example, investing in bonds can help cushion some of the effects of rising prices, while investing in stocks during times when there is deflation or disinflation can help you stay on top of the inevitable price increases that will come.
What is the future outlook for economic growth, and how will it affect your money?
The future outlook for economic growth remains unclear. Some economists forecast a recession in the next 18 months, while others say that these concerns are overblown and won’t materialize until 2020 or beyond. In any case, you should be prepared for interest rates to rise from their current levels even if they remain low by historical standards. It’s better to plan for the future than find yourself scrambling in its early stages.
The economic growth outlook is still unclear, but some projections show that a recession will happen soon. These concerns could be overblown, however, and they might not occur until 2020 or later. In either case, you should take precautions now so you aren’t caught off-guard when rates do start rising from their current levels, even if they remain historically low at the moment. It’s best to prepare for any scenario than wait and see what happens during these uncertain times.
To conclude, inflation is the most important determinant for your purchasing power or how much you can buy with a dollar. Borrowers should understand this concept because it helps them better prepare for student loans and other types of debt like mortgages since they will be bearing the brunt of higher interest rates when they come. There are ways to diversify investments to reduce exposure and inflation’s effects on your portfolio, like investing in index funds that spread across many different companies, including during periods of high or low inflation. The future outlook for economic growth remains unclear, but some projections for a recession are happening soon. It’s best to plan for the future than find yourself scrambling during its early stages.