Inflation is the term economists use to describe a decrease in the purchasing power of money.
Inflation, prices go up while wages stay the same or even go down. You will need more money to buy things than before, and your salary doesn’t stretch as far as it used to. So inflation is really about your paycheck buying less stuff than it did before because everything around you costs more – not just gas and food but also clothes and entertainment.
And inflation can be very sneaky: It sneaks up on people when they least expect it – like during periods of economic downturns or wars when there are shortages in goods available for purchase such as oil, steel, coffee beans, and toilet paper. The bottom line? Inflation is inflation. It doesn’t matter whether it’s “good inflation” or “bad inflation.”
- What is inflation?
- What is the current inflation rate?
- What causes inflation?
- Is inflation bad or good?
- How does inflation affect me?
- How does inflation affect stocks?
- Who benefits from inflation?
- Who is most hurt by inflation?
- How does inflation affect the economy?
- How do we prevent inflation?
- Do house prices rise with inflation?
- What happens to rents during inflation?
What is inflation?
It is a general increase in prices for goods and services. It usually results from an imbalance between the supply of and demand for currency; specifically, inflation usually results from expanding the money supply, inflationary policies, or government debt (i.e., inflation caused by central banks). You could incur higher costs for borrowing to pay for debts if inflation outpaces wages.
What is the current inflation rate?
The inflation rate today as of June 2021 is 5.4%
What causes inflation?
It occurs when supply outpaces demand. The primary sources of inflation in the US are:
Overheating economy (demand is too high for the amount supplied) War deficits, when prices go up as inflationary expectations increase Government debt (caused inflation) Inflationary policies Monetary policy with inflation targets Debt monetization (can be caused by central banks expanding the money supply)
What it is not: It is not an increase in the money supply. An increase in the money supply can cause inflation, but inflation doesn’t have to occur due to an increase in the money supply.
If other things are happening like an overheating economy (where demand outpaces supply), inflation may happen regardless of the money supply. Everything boils down to one thing consumer demand.
Is inflation bad or good?
It is terrible for people on fixed incomes, like the elderly and pensioners, because inflation can cut their buying power.
Inflation is good for borrowers – inflation erodes the actual value of debts; however, it also erodes savings.
How does inflation affect me?
1. The rising prices of necessities such as food and gas affect inflation the most because you have to buy these products every month.
2. Basic inflation affects mainly the poor, those who are unemployed or with lower-wage jobs; that can’t afford the increase in costs for necessities like food and gas. How can unemployment affect inflation? Unemployment can cause it (in the short run) because there are fewer buyers for a given amount of goods and services available.
3. In the end, inflation affects everyone. You see it when you pay more for your mortgage or car loan because it can increase the interest rate on loans and mortgages.
4. Inflation affects everyone differently because your lifestyle is unique to you and your income and expenses. If you have high expenses but not a high enough income, sometimes people have to borrow money, like credit card debt or a personal loan. That borrowing will come with increased costs due to the additional costs in higher interest rates.
How does inflation affect stocks?
1. Stocks are inflation hedges because companies with inflation-proof business models will benefit from it.
2. However, inflation is not always good for stocks because it can discourage spending and savings which in turn hurts corporate earnings and the stock market.
3. It also disrupts inflation-proof business models; it makes them more volatile due to larger price swings.
Who benefits from inflation?
Borrowers: inflation erodes the actual value of debts; however, it also erodes savings
Creditors: it raises interest rates on loans and mortgages. Higher inflation rates mean creditors maintain a higher return on their money if it outpaces wages.
Other beneficiaries of inflation include governments that can repay inflationary debts with cheaper money.
Who is most hurt by inflation?
All of us are affected by inflation in unique ways. Fixed-income Americans are hurt the most by it. With the cost of everyday necessities increasing, inflation can cut into the buying power of such Americans.
Borrowers can protect themselves by inflation-proofing their loans. In inflationary times, consider paying back your loan principal early to avoid additional avoidable costs.
Finally, inflation affects everyone, so ultimately it will affect you. Ensure you are prepared, so you are not blind-sided by any of this.
What I have learned thus far:
It has taught me that I need to live within my means and spend wisely. If inflation continues, I think it’s wise to make contingency plans before it begins to take its toll on the economy.
How does inflation affect the economy?
With inflation, the government is robbing savers and pensioners of their wealth. It also discourages companies from investing in new projects.
It can be a vicious cycle, inflation leads to more inflation, and it’s impossible to know how lousy it will get or where it will stop. Keeping it in check is critical for the economy to stay healthy. Long-term inflation can also lead to inflation-caused recessions.
How do we prevent inflation?
To prevent it, we must increase the economy’s ability to balance out supply and demand. The best way to manage it is with a steady growth economy where productivity outpaces inflation by increasing our production capability.
We can make this happen now with innovation or economic improvements like a more efficient use of resources.
Do house prices rise with inflation?
It does affect house prices; it raises the price of building materials and labor, which will affect the final sales price.
If you are looking to purchase a house, do your research, and be inflation-proof yourself, it can significantly impact the long-term cost of your house.
It also has more subtle effects on housing prices. It makes electricity and water more expensive, which increases home operating costs.
With inflation, you will be paying higher taxes as it can cause governments to raise tax rates.
It even affects the dynamics of buying a home. Inflation has made it more difficult for homeownership to be affordable in recent months, making it harder to purchase a home. And getting a mortgage could be more difficult due to higher interest rates.
In inflationary times, it’s wise to view rising home prices cautiously. Short-term inflation can lead to inflation-caused housing bubbles. The best protection against it is good money management and healthy spending habits.
What happens to rents during inflation?
Rents are affected by inflation in several ways. First, it makes the inflationary cost of living expenses like food and energy more expensive, which raises costs for renters.
Secondly, it affects wages; if it outpaces wage growth, rents will go up as landlords charge higher rents to keep pace with inflation. It also increases property taxes which further erodes renters’ inflation-adjusted income.
It also affects the dynamics of renting; it has made it more difficult for renters to have affordable housing as it raises property taxes and increases monthly rents. If wages do not keep pace with it, renters could have a hard time keeping up with their housing expenses.
It also affects the demand side of renting; it reduces the pool of potential tenants who have sufficient incomes during inflationary times. Inflation-proof yourself by keeping to a strict budget and living below your means.
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