A lot of households and policymakers are becoming more and more concerned about Inflation as well as its causes and effects on the standard of living. From rising food prices to diminished value, a rising cost of living affects everyone.
What’s inflation and what’s causing it?
If you’ve been watching the news, and observing how much you spend when you shop, you might have noticed that the price of things continues to increase.
You might be wondering why the prices are going up. This is where inflation comes in. There are different ways to measure inflation but one of the most commonly used measures is the Consumer Price Index (CPI) which looks at the changing prices of products.
Simply put, inflation happens when the cost of things increases.
During the pandemic, many countries struggle with inflation. With the series of lockdowns, a lot of businesses decided to shut down and workplaces closed. During this time also, most governments stepped in to provide massive investments and support to keep people out of poverty and the economy alive.
What does inflation impact?
Inflation impacts almost everything. As people need to start paying more for everyday items, households will continue to find that their money is worthless.
But inflation can have a particularly challenging effect on savers, homeowners, and retirees. Imagine this, if you’ve been saving for a long time, are paying off a mortgage, or are drawing on a fixed pension, all of a sudden you can find yourself having to pay more with less.
As inflation rises, savings accounts are no longer able to keep pace with the rising cost of living. The costs of mortgages and associated household bills increase and the value of pensions shrinks.
One of the most common ways the central banks and governments try to combat inflation is through changing interest rates or the amount of interest that you will earn on your money when placed in a savings account.
People will save more and spend more if the interest rate goes up and prices go down. However, this will also impact things like mortgages, higher interest rates can mean the amount you will need to pay on a mortgage could also increase.
What are the common effects of inflation?
Wears down the purchasing power
As we may know, inflation is a decrease in the purchasing power of currency due to a rise in prices across the economy.
Encourages spending and investing
As with many, the most common response to declining purchasing power is to buy now and not to delay it. Since most people think that cash will eventually lose value, it is better to buy and stock up on things that probably won't lose value.
For consumers, that means filling up gas tanks, stocking up the freezer, and so on while for businesses, it means making capital investments that might be put off until later.
Causes more inflation
Unfortunately, the urge to spend and invest during inflation tends to boost inflation which then creates a potentially catastrophic feedback loop.
As people and businesses spend more to reduce the time they hold their depreciating money, the supply of money becomes higher than the demand which makes the purchasing power of currency fall at a faster rate.
Raises the cost of borrowing
If interest rates are low, companies and individuals can borrow cheaply to start a business because low rates encourage spending and investing, which generally stokes inflation in turn
By raising interest rates, the monthly payments become a bit high. So, it’s better to put some money in the bank to earn interest.
Reduces unemployment
Experts say that inflation can push down unemployment. When wages become sticky, they change in response to economic shifts.
The same may also work in reverse, wages' upward stickiness means that once inflation hits a certain rate, employers' payroll costs fall which makes it possible for them to hire more workers.
Increases growth
Unless there is an attentive central bank on hand to push up interest rates, inflation discourages saving, since the purchasing power of deposits erodes over time. That prospect gives consumers and businesses an incentive to spend or invest. At least in the short term, the boost to spending and investment leads to economic growth.
Weakens or strengthens the currency
According to experts, high inflation is usually associated with a slumping exchange rate. Economies that import significant amounts of goods and services must pay more for these imports in local-currency terms when their currencies fall against those of their trading partners.
How’s the inflation in 2022?
After learning about inflation, its causes and effects, you could probably be asking yourself now - how long will the current rate of inflation persist?
However, no one could answer this question now as countries around the world all face inflation, and each country is still undergoing its recovery from the pandemic. As vaccination campaigns become successful, they will get global supply chains operating back at normal levels, which will then improve item shortages.
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