Inflation: What and How does it affects you?

  • 19 July, 2021
  • 8:07 pm EEST


In Definition of the term, inflation is defined as a rise in the price of goods and services. It occurs when the cost of goods and services rises over time.

The spending power or value of money falls when the price of products and services rises.

What impacts the inflation?

The income people earn and the cost of raw materials are the two main factors that can influence inflation.
We experience inflation when salaries rise; we experience inflation when the cost of raw materials rises. Cost-push inflation is the term for this type of inflation.
When there is a high demand from consumers, demand-pull inflation arises.

When there is a strong demand and supply levels do not align, prices rise, resulting in inflation.

How to Calculate Inflation?

[(final CPI index value – initial CPI value) ÷ initial CPI value] * 100

  • CPI is known as the consumer pricing index, which measures the changes in prices based on a weighted average market basket of goods and services.

Why is Inflation Important?

  • Inflation works as a motivating factor to utilize any labor or resources that are not optimized to full potential.
  • Inflation also helps avoid the paradox of thrift, which claims that if prices fall consecutively, then people will wait and look for better deals.
  • If people are constantly waiting for better deals, then the aggregate demand will fall, reducing production and economic productivity.
  • Inflation is also vital for people who have taken out loans. This is because the money borrowed becomes less valuable over time and becomes easier to payback.
  • Therefore inflation is crucial as it pushes people to borrow money.

Inflation in Practice

  • For example, if one gallon of petrol costs $1.50 in 2000 and one gallon of petrol now costs $2.5, then how would you calculate the inflation?
  • 2.5 – 1.5 = 1 -> 1/1.5 = 0.67 -> 0.67*100 = 6.7% therefore, the inflation went up by 6.7%.

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