The key economic concepts directly affecting your purchasing power are inflation.
The general level of prices for goods and services rising is called inflation. Now that we have covered inflation, let's talk about how prices for different goods and services are rising.
When applying inflation, then it means money lost its value. Something which you have today as a dollar will not buy what it could a year ago. It is very crucial to
understand exactly what inflation is and how it may perhaps affect you so that you have long-term financial planning.
What Is Inflation?
It is the general rise in the level of prices of goods and services in an economy as the purchasing power of money falls proportionately. This can be measured by indexes like CPI, amongst others. It measures the common basket of goods and services that the consumer spends regularly on.
Types of Inflation
Demand-Pull Inflation: It is an inflation caused when the demand created for
products and services exceeds their supply as a result of which price increases. For instance, if the economy develops, a consumer would have more money in his
pocket and therefore spend more on products which causes inflation.
Cost-Push Inflation: This is the type of inflation generated when the cost of producing products like wages and raw materials go up and are passed on by business from the pockets of the producers in increased prices.
Built-In Inflation: Built-in inflation is when the higher, high-frequency wage
increases that companies undertake to deal with the rising cost levels that raise the cost of producing any given item or service also ultimately drives up prices, which in turn accelerates inflation still further.
How Does Inflation Affect Your Money
How does inflation affect everything in your money-from your daily expenditures to saving for retirement? Here's how:
Eroding Purchasing Power
The second direct consequence of inflation is the loss of purchasing power. It simply means that the given amount of money can buy less goods and services over time because prices are going up. Thus, even with a maintained salary at a 5% rate of
inflation, real income decreases and how much money would stretch before.
This eats into the value of savings. That would mean that, for instance if the rate of inflation is more than the interest earned on a savings account, then real value terms of savings will be depleted. Thus, though you may have much money, it would
actually amount to less in terms of actual value in terms of purchasing power.
Effects on Investments
Even investments are not resistant to inflation. For example, while other investments tend to do very well in periods of inflation because prices seem to shoot up with the force of inflation, fixed-income investments such as bonds do very badly during times of inflation, because fixed interest payments may prove too little to offset the inflation, and thus the real return would decline.
Inflationary Raise in Cost of Living
Good or service that is required to survive, whether food, care, or education, is
inflation. So, you have the privilege of having to pay even higher costs with higher prices, day-to-day expenses, to add to your worry.
Higher Interest Rates
If the central banks believe that inflation is rising, it may take a variety of tools to
drain some of the oxygen from the party driving up inflation; for example, it will have to raise interest rates here in the United States. Lenders charge higher interest if
interest rates increase; so of course, this means mortgage interest rates, credit card interest rates, and even loan prices will all be higher.
Check Your Budget
If inflation increases, then you are more likely to be closer to your budget and cost of spending. Cut down on all the wasteful expenses so that you will save or invest the amount recovered. Notate the goods whose consumption is likely to be affected by inflation, such as groceries and utilities, and notate when you cutback on them.
Diversify Income Streams
Increase in Income: An increase in income is a very potent deflator of the velocity of inflation. Fight for a rise in your salary at work, develop some small business
outside your normal employment, or acquire some useful skill that improves the prospects of your salaries-do this and you will ensure that your standard of living prevails even when prices move upward.
Conclusion:
Inflation is also a part of the economic cycle and can't be avoided: sometimes it's so inconsiderable an inflation influence on well-deserved money, and sometimes even absolutely gigantic; yet with knowledge of inflation one has all chances to act
proactively: invest in assets resisting inflation, to adapt a budget to inflation and to diversify a portfolio to soften an impulse of inflation and to guarantee a financial future.
