Inflation is one of the few words that has been giving both homeowners and economists chills. If you are not living under a rock, you probably know that uncontrolled inflation doesn’t bring good news to a county. But do you know how it affects your earnings, your spending and your life in general? It has both positive and negatives effects and when inflation is controlled, it could even boost the economy.
Let us learn about 5 ways in which inflation affects your life and why you should be concerned about rising rates.
It makes you spend
Inflation means that the average prices of goods and services will rise year on year. This means that buying something today will be cheaper than buying it tomorrow.
Let’s take an example. You can get a burger for $5 today. Tomorrow it will cost you $5.25. The same burger, the same size, will be available for a higher price tomorrow because of inflation. If you consume it today, you will be deriving the same utility as you would derive tomorrow.
It helps the economy grow
The economic growth of a company is also dependent on how much people spend. If all the people in the US stopped spending, the economy will come tumbling down. If you continue delaying all yours spends for tomorrow, instead of today, the producers of goods and services will also lose the incentive to produce. Eventually, the economy comes to a halt. As you don’t want to buy, no one will produce. Growth only occurs when you spend and you will only spend when you know that things will be cheaper to buy today than tomorrow.
Inflation can be self-sustaining
Inflation could sustain itself when businesses and people start acting irrationally. They know that the value of money they hold will depreciate in the upcoming days. Therefore, they could end up spending recklessly today in order to buy cheap. This could lead to a feedback loop which may keep increasing prices and lead to more inflation. An economy that falls into the trap of such uncontrolled inflation eventually faces extreme financial pressures.
It can affect exchange rates
If the rate of inflation in your country is higher, your currency will become less valuable. Let’s understand how this happens with a simple assumption. Inflation is US is 2% because of which 1 USD exchanges for 1 EUR. If inflation here goes all the way up to 5% and the government fails to keep it in check, 1 USD will exchange for only 0.50 EUR.
This will create problems for imports and exports. Americans will have to buy everything at a higher price now which would lead to more price increase back home and more inflation.
It erodes the value of your investment
Any investment instrument that doesn’t give you a decent return over and above the rate of inflation is not an investment but a mistake. If your investment yields 2% returns and the inflation rate is also 2%, any return you get should be counted as zero.
Inflation is a tricky thing to control and it could catapult the economy or help it grow steadily. The central banks of all countries try to control inflation so that your money can stay safe.
I set this blog up a couple of years ago now as a way to share my experience that I’ve gained through my school education and my real life education. It sounds geeky, but the economy is something that I’m really passionate about and it’s something that I am actually pretty talented in, so it’s great for me to share these experiences with those that may be struggling a little bit with finance and figuring out how to navigate the economy.