Inflation is an increase in the price of goods and services. It’s usually caused by an increase in the amount of money in circulation. When there’s more money chasing the same number of goods and services, prices go up. Inflation can also be caused by increases in the costs of production, such as wages or raw materials reaching extreme scenarios of hyperinflation. It is measured by the Consumer Price Index (CPI), which looks at the changes in prices of a basket of goods and services.
What is Inflation? (Definition #2)
Inflation is a sustained increase in the general level of prices for goods and services in an economy over a period of time. It is measured by calculating the percentage change in a price index, such as the Consumer Price Index (CPI). Inflation can also be described as a decline in the purchasing power of money, where each unit of currency buys fewer goods and services.
Inflation and hyperinflation are related but distinct economic concepts. Inflation is a sustained increase in the general level of prices for goods and services in an economy over a period of time. Hyperinflation, on the other hand, is a very rapid and extreme form of inflation. It occurs when the monthly inflation rate exceeds 50% and prices double every few weeks or days. Read more: What is Hyperinflation?
Causes of Inflation
While there are a variety of causes of inflation, some of the most common include:
- Increases in the fiat money supply.
- Excessive government spending.
- Tariffs or other trade restrictions.
- Changes in aggregate demand.
- Rising costs of production.
Effects of Inflation
When inflation is high, it can cause problems for people and businesses. For example, it can make it harder for people to afford goods and services, and it can make it more difficult for businesses to plan and make decisions. In some cases, inflation can also lead to higher interest rates.
Inflation can have a number of negative effects on an economy, including higher prices for consumers, reduced real wages for workers, and increased borrowing costs.
Measures to Control Inflation
Governments often use a variety of measures to try to control inflation, including:
- Changes in interest rates.
- Monetary policy.
- Fiscal policy.
In conclusion, inflation is a natural occurrence that happens when the demand for goods and services outstrips the available supply. It can be caused by a variety of factors, including changes in monetary policy, natural disasters, or surges in population growth. While it can be harmful to economies, inflation is also a sign of a healthy, growing economy.
How to Protect Yourself from Inflation
Let’s see how could you protect from inflation:
- One way to do this is to keep an eye on the news and be aware of what is happening in the world.
- Another way to prepare is to have a stash of cash on hand in case things get bad quickly.
- It is also important to have a plan for what you will do if hyperinflation does occur.
- Have a backup plan for your job, your finances, and your home.
- If you live in a country that is prone to hyperinflation, it is also a good idea to have some of your money outside of the country.
- Invest your money in assets such as stocks, commodities, energy ETFs and the like that appreciate along with rising prices.
Example of Inflation in Argentina
In Argentina, hyperinflation has been a problem for decades. The government has tried to control it by implementing price controls and other measures, but they have not been successful. In July 2018, the annual rate of inflation was 47.6%, and the monthly rate was 3.9%. This means that prices were increasing by almost 5% per month.
The main reason for the high inflation rates is the government’s large deficits and its efforts to monetize the debt. This means that the government is printing money to pay its bills, which causes prices to rise. See also: Example of hyperinflation in Argentina (1989/1990).