Inflation: A Decrease In The Purchasing Power of Money
“An investment in knowledge pays the best interest.” — Benjamin Franklin
Do you ever hear your parents narrate how inexpensive the cost of goods was in the past?
We were maybe awed on how cheap the costs of commute way back and the cost of an allowance of our parents going to school are low compared today.
We go to supermarkets where we observe the price of one pack of bread, coffee or a can of sardines is different from the price 10 to 20 years ago.
Time flies so fast.
Inflation is the decline of purchasing power of a given currency over time (Investopedia).
According to We Forum, a moderate amount of inflation is generally considered to be a sign of a healthy economy. As the economy grows, the demand for stuff increases.
The workers benefit from this economic growth as it drives an increase in demand for labor and wages would usually increase.
So, what are the causes of Inflation?
Economists distinguish between two types of inflation: Demand-Pull Inflation and Cost-Push Inflation (Federal Reserve Bank of San Francisco).
The Demand-pull inflation happens when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity.
On the other hand, Cost-push inflation happens when prices of production process inputs increase. Rapid wage increases or rising raw material prices are common causes of this type of inflation.
Money Printing
There was an increase or growth of printing money from the FED in the United States throughout the years. The COVID-19 pandemic caused a lot of printing of money to pay off debts.
Economists stated that if the central banks print more money, the amount of goods does not change but the households will have more cash and more money to spend on goods.
If there is more money chasing the same amount of goods, the firms will put up prices.
Price Metrics Changes
We examine the price changes in selected US consumer goods and services and wages from the years 1998 to 2019 relative to the above chart of the money supply.
Most countries around the world have experienced this rise. It might be interesting to see the changes but alarming for several people because of the rising change in price.
Food and Beverages to Hospital Services were overall inflated while New Cars to Televisions became more affordable or cheaper in time.
A reference showing that the common U.S. inflation rate is 2%, optimum level is 1–3%, 1st world countries are 0–5%, and hyperinflation is 50%.
If inflation is greater than 2%, it becomes threatening. Walking inflation is when prices rise between 3% to 10% in a year. It can drive too much economic growth.
At that level, inflation robs our hard-earned money. The prices of things we buy every day rise faster than wages. Thanks to walking inflation, it takes $24 today to buy what $1 did in 1913 (The Balance, 2020).
Hyperinflation is frightening to happen and some countries are experiencing this where the value of the goods is high and the currency they have is now worthless.
A recent data from Charlie Bilello (2021) regarding the global inflation rates of several countries around the world.
United States of America =5.0%
Philippines = 4.5%
Reflection
Inflation is an important factor to know and understand. This might create fear to the public because of the price changes but allows finding ways to get an income and apply a hedge on it.
The level of inflation could be a good factor because of rising economic growth but too much of it would lead to inferior outcomes that would affect the public.
When the money is only kept in the bank, only a few percentages are increased annually in the savings account.
As observed, inflation eats our money, and our savings' real value would decline as it limits their ability to save and invest for the future.
What is the lesson here?
The most important thing to understand is that financial education must be taught in schools and communities worldwide.
It is a way towards building a foundation of financial independence. We must live below our means, be patient and invest the money we earn and let it grow for the long term.
As we might fear there would be price changes in the long term, we must be prepared for it and embrace opportunities that would help us reach financial freedom.
References:
Warr, R. (2019, June 170. Everything you need to know about inflation. https://www.weforum.org/agenda/2019/06/inflation-is-healthy-for-the-economy-but-too-much-can-trigger-a-recession-7d37501704
Investopedia. What is Inflation. https://www.investopedia.com/terms/i/inflation.asp
Federal Reserve Bank of San Francisco. (2002, October). What are some of the factors that contribute to a rise in inflation? https://www.frbsf.org/education/publications/doctor-econ/2002/october/inflation-factors-rise/omics/why-printing-money-causes-inflation/
How Much. (2019, January 28). Price Changes Over the Last 20 Years Prove the Economy is Rigged. https://howmuch.net/articles/price-changes-in-usa-in-past-20-years
Amadeo, K. (2020, November 19). Reasons Why Inflation Is Good. https://www.thebalance.com/why-is-inflation-good-4065995
https://twitter.com/charliebilello/status/1408229505886568452/photo/1
WonderWhy. (2013, September 1). Why can’t we just print money to pay off debt? https://www.youtube.com/watch?v=EobPnLZiOo8
