Basically, most people think of inflation because it has something to do with our money which may also reflect just how we spend our money. This is where the concept of inflation comes in. By definition, inflation is the increase or decrease of money’s purchasing power. It is being reported in economics in terms of change in rates. It generally hurts our buying power because increasing prices require us to pay more for the exact or same services and goods. Well, you are lucky if you are an income inflation recipient. On the contrary, our power to purchase these goods and services declines when the increase of our income is slower than the general inflation even if you are earning more.
Inflation’s causes tend to be varied as it does not equally affect everything. This economic phenomenon can be attributed to the increased production cost of a product or service due to factors like product scarcity, high interest rates and tax increases. It may vary from little to the extreme level. It is being measured through the economy’s entirety although there are certain products that seemed to be more vulnerable to inflation because of certain circumstances, while others may have their own variables that help reduce their cost. Among the other reasons for inflation in the economy are the demand-pull theory, the federal government deficit, the cost-push theory, and the excessive monetary growth.
How does inflation affect us then? The declined purchasing power of dollar and its depreciation are the immediate effects of the inflation. Take into account that dollar depreciation is really hard among the retired individuals who have fixed incomes. So it will be necessary for us to rearrange your own budget if the income we are holding now has lesser value when use to purchase goods or services. This may even ask you to use more currency in purchasing the same products of services.
Inflation has a great impact on our economy since economies are organized according to the value of currency inside and outside certain country. The economic system of the country is dependent on the monetary value they are using to keep its economic stability. This suggests that all our financial interactions are negotiated according to the value of dollar against the currency of another country. Notwithstanding the fact that inflation emerges gradually, it is still noticeable.
It is true that inflation or prices increases investments, allowing investors to preserve their wealth’s value even though currency price decreases. It lowers the value of loans in banks, which helps mitigate the burden of students and homeowners. However, increase investment may result in brokerage firm and hedge fund speculation and mismanagement. It increases export price, which pushes other countries to find for cheaper deals. A devalued currency suggests that imports are more expensive and that increase in imported goods prices results in higher inflation. This entails that low-income and fixed families have no capacity to keep up with the increasing prices and only damage their standard of living.
To address the effects of inflation on our economy and the whole community, inflation management is imperative. Many governments attempted to maintain low inflation level in order to enjoy its benefits without suffering from its effects. Central banks have the capability to moderate inflation through the regulation of lending and interest rates. Governments may also fix the costs of goods or fix the wages to prevent rapid price increases. They are also manipulating the demand and supply of these goods by imposing regulations for import and export trade.
So, no matter how inflation affects us, there are still ways we can follow so that inflation rate will not hurt us that much.