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Inflation describes the increase in prices over time. More specifically, a given amount of money has less purchasing power over time. It is a decrease of purchasing power of a given currency over time.
How quickly those prices go up is called the inflation rate.
A given change in the price level of products - the inflation rate is calculated over certain periods. Most often, it is a year-on-year change. This is calculated as the ratio of a selected index (for example, the consumer price index) to the beginning and end of the period. Most commonly, at the beginning and end of the year.
The opposite of inflation is deflation. It occurs when the purchasing power of the currency increases - that is, we buy more with the same amount of money than we did at the beginning of the period.
What causes inflation?
Most economists agree that the main reason for rising inflation is the rising money supply.
The money supply can be explained as the total volume of money held by the public at a particular point in time. This is where the national bank has the most power, as it primarily regulates the amount of money in circulation.
Other causes are mainly the rising prices of material resources with their gradual depletion. Or when the world is hit by a noticeable natural disaster.
So, for example, as world coal supplies run out, the price of coal rises and so does the price of everything that needs coal. This reduces the value of money.
Effects of inflation.
With inflation, owners of non-monetary assets, such as property, shares, or gold, can expect the value of the assets to rise, while those trying to acquire them will have to pay more.
In terms of the impact on employees, employee pay often lags behind inflation. Even with rising inflation, employee pay is often fixed. But high inflation is leading employees to demand faster wage increases. Faster wage increases can lead to further inflation - this is called an inflationary spiral.
It can also result in the hoarding of goods. People try to maintain their wealth by buying durable goods (which become more expensive during increasing inflation). This results in shortages of these goods and waste.
How to resist it?
Anti-inflation products such as gold, real estate, and commodities can be the starting point for individuals who want to protect their wealth.
It is also a general rule that in times of unexpected rises in inflation it is less beneficial to save and more profitable to spend or go into debt.
It can also help you to have one more income. You can choose one from my Best side hustles list.
When inflation gets out of hand
Hyperinflation occurs when inflation starts to be expressed as at least a three-digit number (100+%). Money is devalued, it no longer fulfills its function - it is no longer a store of value, it is displaced from exchange processes by the exchange of goods.
We know such an example of hyperinflation from Zimbabwe, wherein in 2008 the month-on-month inflation estimate was 79.6 billion percent and at 89.7 sextillion percent per annum. This resulted in the printing of, for example, 100 trillion dollar banknotes.
Which were still relatively worthless.