Inflation

Introduction to Inflation

Definition:

Inflation is sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase.

1. The value of a dollar will change over time. With increasing inflation, the purchasing power of money will decrease.
2. Example: If inflation rate is 2% per year, then a $1000 computer will cost $1005 the following year.

Causes of Inflation

1. There is a large increase in the demand of a limited of goods.
2. There is an increase in the operating cost of certain organisations or companies, and in order to prevent loss of profit, the prices of goods increase.

Measuring Inflation

1. Certain products that could represent the economy are put together into a “basket”.
2. The cost price of this basket will then be compared over time.
3. This will bring about a price index, which is the cost of basket at present, as a percentage of the cost of that identical basket at the start of the year.

Types of Inflation

1. Deflation

• General decrease of prices
• Opposite of Inflation

2. Hyperinflation

• Rapid inflation
• May lead to breakdown of a nation's monetary system
• Example: Prices rose 2,500% in one month in Germany in 1923.

3. Stagflation

1. Combination of high unemployment and economic stagnation with inflation.
2. Example: A bad economy was combined with OPEC raising oil prices in developed countries during the 1970s.

4. Agflation

• An increase in the price of food that occurs caused by an increased demand from human consumption or as an alternative energy resource.
  
• Unfortunately, these price increases spread to other non-fuel related grains as consumers switch to less expensive substitutes for consumption. Agflation will also affect non-vegetative foods (eggs, meat and dairy) as the price increases for grain will make livestock feed more expensive as well.

 

Tips and tricks on what to do during an inflation

• Save up!
• Cut down on spending on products that prices have gone up too much and make sure you do not purchase it if it is not considered as a need.
• If you have any extra money, make sure you save it or allocate it to buy something that you are in need but the prices have gone up.
• Have a spending budget and a saving plan.
• As your doctor for generic drugs like paracetamol instead of brand-name ones like Panadol.
• Buy house brands in supermarkets.
• Take public transport and avoid taxis .
• Choose countries to travel where rates are lower.
• Buy stationery refills.
• Buy second-hand textbooks, shirts and clothes if possible