What is inflation and how does it affect me? Despite how much is read and heard in the news, newspapers and social networks, for many it is not always entirely clear what it is about. Some think it affects who ‘has more’. The reality is that the most dispossessed are the most committed.
Inflation is the uncontrolled and sustained increase in the cost of goods and services. It’s easy to spot when you’re looking for food, clothing, and other essential supplies. It is also possible to notice it when consulting about products outside the basic basket.
It translates into an obvious loss of purchasing power. That is, with the same amount of money, the number of items that can be purchased is less. Which in turn implies a decrease in quality of life.
There are several ways to calculate this data. In most cases, the Consumer Price Index (CPI) is used as the basis. This is the indicator of the average cost of goods and services in the last link of the distribution chain. It is what the population pays to cover their needs.
In general, we talk about the increase in the inflation rate with annual reference. That is, the growth of this index during the last 12 months.
Types of inflation
- Hyperinflation: when the annual index is greater than 1000%
- Jumping inflation: annual variation of two or three digits.
- High inflation: between 4% and 10% increase during the last 12 months.
- Moderate inflation: variation between 2% and 4%
- Controlled inflation: when the increase in the index is greater than zero, but less than 2%.
- Deflation: occurs when the variance is negative. That is, in a period of one year, inflation decreases and is expressed in negative numbers.
The ideal is for this index to remain constant and without leaving the “controlled” category, according to the opinion of economists. This scenario assumes better conditions for the development and economic growth of a country and its citizens.
The higher the index, the more difficult the economic outlook will be. Which by no means means that deflation is an optimal state. A negative inflation index is synonymous with low consumption, low production and contraction of the GDP of a nation.
Causes of inflation
Excess demand versus low supply is the most common cause that gives rise to inflationary scenarios. But it is not exclusive.
Among the causes of these phenomena, distorted monetary policies can also be pointed out. For example, excess paper money circulating among the population without this having a correlation with the level of production of a country. In the last decade, the case of Venezuela has served to illustrate this type of lack of control. But in history it has not been the only one.
What is inflation and how does it affect me?
How does it affect me is the question that usually accompanies what is inflation. The quick answer is that with the same money there are fewer possibilities to acquire goods, products and services.
It also affects the ability to save. While interest nominally makes money held in a financial institution grow, its real value is devoured by the inflation rate.
How can I protect myself against inflation?
Although it is an aspect that is beyond people’s control, there are specific measures that allow us to deal with these situations. One of them is to meticulously plan family expenses through a budget. Having clarity on the path of income and expenses allows you to see the panorama with some breadth.
The same as investing in products that maintain their value. An aspect that we will develop in future articles of this blog.
