Inflation

 

“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.” according to Ronald Reagan.

 

Inflation is one of the most commonly discussed topics in Economics and is dreaded by countries whenever its rate becomes high. Despite the frequent discussion of the topic, some people still find it difficult to give it an explicit definition and explanation. 


However, an understanding of inflation and how it affects you and the economy is essential if you must thrive financially.

In economics, Inflation is defined as the general increase in the prices of goods and services in an economy. This means, there is a rise in prices and a decrease in the purchasing power in a country. Consequently, the unit of the currency buys fewer goods and services. Inflation could be positive or negative, depending on the rate and the viewpoint however, it increases the cost of living in a society.


It is worth noting that an increase in the price of a particular goods/service in the country cannot be said to be inflation. Inflation is a ‘general’ rise in prices. Though the price of a good/service could increase in a way that affects others.


Causes of inflation 

According to Robert Kiyosaki, inflation occurs when there's too much money in the system. The price of goods and services begins to increase when there is too much money in circulation and this results in inflation. 


Inflation has several causes, some of them are;

• Cost-Push Inflation: This type of inflation occurs when there is a high cost of production and raw materials. For Example, In Nigeria where the nation depends mostly on Petroleum, the price of goods/services increases once there is an increase in petroleum products (Like Fuel and Diesel) because an increase in fuel means an increase in the cost of production. This type of inflation is caused by a rise in the cost of production. 

Cost-Push Inflation can decrease a country's economic growth and consequently, increase the cost of living.


• Demand-Pull Inflation: This type of inflation occurs when there is an aggregate demand due to a shortage of goods/services. When there is a rising demand for goods/services that outruns the supply, firms tend to push up the prices. This happens in a rapidly growing economy. In simple terms, Demand-pull inflation is “too much money pursuing too few goods/services".


• Built-in Inflation: This can also be referred to as ‘the expectation of inflation. This type of inflation is caused when people expect a raise in the standard of living, therefore demanding higher wages, this rise in wages would result in higher prices of goods/services. Also, when people expect a raise in the price of goods, it increases the demand for the goods and increases the price of the goods


• Deficit-induced Inflation: This inflation is caused when there is a deficit in the national budget of a country usually if the expenditure is more than the revenue. A way to remedy the deficit in the budget is to print more money, which will consequently lead to inflation.


• Devaluation: When a country’s currency loses value against other currencies, it leads to the high cost of imported goods, and this can affect the cost of other goods and lead to inflation especially if the country imports most of these goods.


Other causes of inflation include;

• Printing more currency notes 

• Financial institutions give loans to the public than the economy needs. It can also be referred to as Credit Inflation.

 

Effect of inflation on individuals

As earlier stated, inflation can be good/bad depending on the viewpoint and rate. The effect inflation has on a country’s economy runs down to the individuals, though a small and positive inflation rate is useful economically. When the price of goods rises, someone loses or gains. Inflation affects individuals differently depending on the individual’s income and expenses. 


There are some groups of individuals and how inflation affects them;

• Wage-earners or salaried people: Wage/salary earners suffer during inflation because their income is slow to adjust to the increase in the price of goods/services.


• Creditors and debtors:  In inflation, the creditor loses while the debtor gains. When debts are paid, the value decreases by the price of goods/services hence, the creditor loses. Unlike the creditor, the debtor gains as he pays less the debt in real-time. 


• Investors: This group of people gains during inflation because as prices of goods/services increase and businesses expand their interest rate increases.


• Fixed Income People: Fixed income people involved people that depend on a fixed source of income like pension, social security, etc. Inflation affects this group of individuals negatively as the cost of living keeps increasing without an increase in income.


• Business People: This group of people includes traders, Entrepreneurs, Producers, etc. Inflation favors the business people as profit is high. Business people raise their prices during inflation, that way their profit increases.


Also, Agriculturist gains from inflation because the price of farm production rises higher than the cost of production during inflation.


Other people live on interest income they include bondholders, debenture holders, life insurance beneficiaries, etc. When there’s a price rise, these sets of people suffer because the interest rate is fixed and the cost-of-living increases. 


Tips for inflation

There are a few tips for use during inflation:


1. Don’t leave all your money idle in your bank account. Because money loses its value in inflation and the interest rate is low. Switch to a high-yielding Savings Account. A high-yielding saving account is a traditional savings account that rewards you with a higher interest rate. You could talk to your bank about this.


2. Invest in commodities, Stock, Bonds, TIP, CDs, Real Estate, etc. Investment is one of the best ways to hedge inflation. However, it is advised you study and understand the market before investing as the price rises/falls with the demand or inflation rate.


3. Diversify your investment, don’t put all your eggs in one basket. When investing, diversifying your portfolio will help curb losses.


4. Work with a budget it’ll help you not to overspend unnecessarily. 


While we are trying to protect ourselves and thrive during inflation, let's keep the words of Lassus in mind, she said; “Don’t make dramatic changes based on current inflation or market conditions since most of us are still long-term investors,”. Meanwhile, let’s make lemonade from the lemon inflation thrown at us.

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