Everything you need to know to understand the inflation

Everything you need to know to understand the inflation
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Understand how inflation works is important to anyone routine, since it is almost impossible to avoid it

Do you know what “inflation” means? Even if this word is part of our routine, not everyone knows how inflation affects our day by day, the prices that we pay and how it works. 

The most important thing to know about inflation is that it is inevitably a part of our lives: consumers, businesses, investors, bank services and the economy are impacted by it, regardless of the connection with the financial market or the level that inflation appears in products, services or every other thing that is needed by people.

That’s why it is needed to understand not only how inflation works, but how it affects everything around us. Let’s take a look at what inflation means and everything you should know about it.

What is inflation?

Basically, inflation is an increase in the general prices of goods and services.

It is part of the economy of every country in the world, and, in the United States, it is measured as an annual percentage increase as reported in the Consumer Price Index (CPI), generally prepared on a monthly basis by the Bureau of Labor Statistics (BLS).

Inflation works in a simple way: when it rises, purchasing power decreases, it makes companies adjust prices of their services and products, increasing them, which makes people pay more for something they paid less some time before. 

In the financial market, there is an impact on investments. That’s why analysts and investors keep their eyes on the CPI and PPI reports that are released each month, measuring retail and wholesale inflation.

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What causes inflation?

From increase of production costs (cost-push inflation) and demand for goods and services (demand-push inflation) to speeches of government figures and fiscal policy, everything can cause inflation rates to go up.

It is interesting to understand mainly two of these inflation effects that affect us more directly: cost-push and demand-push.

When we have a cost-push inflation, it means that, while demand for goods and services are the same as before, supplies and other things needed for production and services provision are decreasing because of the higher costs. 

In cases of demand-push inflation, we see a higher search for some goods and services, which makes the demand increase while the offers dwindle because of lower supply. The growth of demand makes prices go higher — in other words, making inflation rise.

Also, governments and central banks can influence inflation rates, injecting money into the economy and increasing spending, i.e. elevating the purchase power of the population and influencing demand-pushing inflation.

How to avoid inflation?

It is impossible to avoid inflation: it is part of our lives and is something that is present in every place of the world, but it is possible to monitor inflation rates and the economy to see what is happening in the financial world and how and when it will affect prices and, consequently, your routine.

It is also possible to save money and avoid buying some products or contract services while they’re in a high demand era: research and monitor prices is important before deciding to buy anything. If it’s impossible to wait to buy, try to find them in promotions or even try to find semi new opportunities.

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If you’re an investor, it is important to diversify your portfolio of investments: try to not focus only on just fixed-income investments, but also choose a mix of asset classes, index funds and real estate-based investments. Also, specialists always note that gold has been considered a hedge against inflation.

The most important thing to avoid inflation is simple: study and keep up with the financial market, so you will not be surprised when the inflation rate increases.

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John Mclane