What is inflation?
Inflation is the measure of the increase in the price of goods and services over time(usually a year).
Imagine if your wage doubles but everybody else's wage triples.this will mean you are now poorer than everyone else.
If there is an overall increase in the price of goods and services of 5% this year. You will need to earn at least 5% more to prevent becoming poor in real terms.
Today each dollar buys you approximately 39 x less potatoes than a hundred years ago.
Inflation is measured by the consumer price index. This is a basket of goods used to determine the percentage rate of inflation.
What causes inflation?
So why does inflation happen?
Cost push inflation:
This is where raw materials rise in price or employers ask for more money and succeed. This can be due to a shortage of good workers which gives current staff more leverage.
Cost of factories might be increasing as well. This prices increases are then pushed on to the consumer
This is when there are people who want something and there is not enough supply of it.. This is usually caused by a reduction in tax as people get richer and have more money to spend.
Fall in interest rates
A fall in interest rates will also increase consumer spending as people have more money to spend and spending is cheaper. When this demand increases suppliers will raise price to match it.
The final cause of inflation is Government printing money.The Government uses this money to loan to banks and there by make it easier for us to get loans. The government can also use the money to invest in companies by loaning them money. This means business can invest more money into the economy and increase wealth.
All of these things lead to inflation.
Inflation does not happen immediately, it takes time before inflation occurs after the causes have already been put into motion.
Is inflation bad?
Inflation Isn't necessarily bad as long as income is rising at the same rate.
Inflation is a problem because it affects the returns on your savings and investments. If your savings and investments are not outperforming inflation this means you are losing money.
Inflation is also an issue because not everything increases at the same rate.
Low Inflation causes prices to go up, unemployment to rise and encourages investing(as people see value in a devalued currency) whilst reducing the cost of borrowing.
High inflation causes interest rates to rise as the government tries to discourage people from spending.It reduces spending as people don't make enough to afford the rising prices.
It also increases unemployment as people spend less and business make less forcing them to cut staff.
Inflation is worse for low income and those with fixed income investments(such as loans) as the value of their money is decreasing and not increasing faster than inflation.