Introduction to Inflation
Inflation is sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase.
- The value of a dollar will change over time. With increasing inflation, the purchasing power of money will decrease.
- Example: If inflation rate is 2% per year, then a $1000 computer will cost $1005 the following year.
Causes of Inflation
- There is a large increase in the demand of a limited of goods.
- 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.
- Certain products that could represent the economy are put together into a “basket”.
- The cost price of this basket will then be compared over time.
- 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
- General decrease of prices
- Opposite of Inflation
- Rapid inflation
- May lead to breakdown of a nation's monetary system
- Example: Prices rose 2,500% in one month in Germany in 1923.
- Combination of high unemployment and economic stagnation with inflation.
- Example: A bad economy was combined with OPEC raising oil prices in developed countries during the 1970s.
- 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