Usually, when people see the prices rising, they blame it on inflation. You probably heard this word before on the news or over social media, but do you know the definition and how it works? These are the main questions to understand “what is inflation?”, an important aspect of economic life.
If you don’t know what that is, don’t worry. OneBlinc has prepared a guide for you to learn inflation’s meaning and other important aspects that surround it, such as the causes, and the impacts on society and the economy. Keep reading to get the answer to “what is inflation?” and learn how to deal with it.
What is inflation?
Have you ever wondered why the prices keep rising year after year? Elderly people usually say “in my time, supermarket shopping was affordable”, and that is true. Every year, people must be prepared to rise and to pay according to the new expectations, even if the salary doesn’t increase the same way.
In the last decades, it was possible to live with smaller salaries because it was a completely different economic situation. You only needed $600 to buy a car in 1930, for example. However, nowadays, that is not enough. As people desire to have their own vehicle, they must invest at least $47,000, the average price of a car in the U.S.
Inflation is the term used to measure the increasing value of goods and services over the years. The rate defines how much the cost has grown after the same period compared to the previous one. Since it is continuous, governments have to learn all about it in order to manage it and avoid crises.
Inflation today is seen as something the government also wants to avoid to decrease the impacts. It is important to deal with it because it defines the cost of living. If it causes too much difficulty for the people, it is common to have financial instabilities as a result of the lower purchasing power after higher prices.
What causes inflation?
Now, it is time to understand more than “what is inflation?”, but how inflation works. There is more than one type with different causes, but the first one is called cost-push inflation. This happens when the costs of production increase and are added to the prices offered to the customers.
It depends on the aspects that vary over the production: the rise in rent, materials availability, such as oil prices, and the price given by suppliers. Another influence on this type is when workers stop the production to fight for better salaries and work conditions.
Another type is demand inflation. It happens when the number of people interested in buying a product increases, and the supplier can’t keep the demand. The last inflation is the build one, when the government lowers taxes, allowing disposable income and better buying power.
Inflation can still be created when the government prints money in a logic to stimulate the economy. It can be done by increasing the number of notes in circulation and the government debt or allowing bigger loans to be given by the banks. All of these situations help the money circulate. Yet, in the meantime, it can be affected when the worth of the note starts to fall.
How inflation is measured
If you know the answer to “what is inflation?”, it will be easy to learn how to measure it with WPI and CPI. The first one is called the Wholesale Price Index, which measures changes in the prices of wholesale products before they are sold at retailers and go to the customers.
CPI is the term used to describe the Consumer Price Index, used in various parts of the world. Different from the last type, it measures the change in the price of goods and services in the market basket. It is also compared by data for each year.
It is calculated by choosing a base year where the CPI is considered 100. To know how much inflation has evolved for other years, divide the value of purchases in a specific year by the value of the base year. The result must be multiplied by 100.
How does it impact the economy?
A positive side of inflation is that, when people expect the prices to rise, they start spending on the present rather than letting it for the future, because the costs will probably be higher. It is good for the economy but is not something that companies must count on, especially because not everyone does that.
On the other hand, if people don’t prepare for inflation, it can be hard to face the higher prices. When the money is short, loans can be a great help but are also affected by inflation. During these times, banks are more flexible in order to circulate money. Yet, interest rates are overpriced, which makes the payment difficult for the borrower.
In general, companies must be prepared to manage prices during inflation to keep a good buying rate. Meanwhile, customers have to make intelligent use of their money. If buying power is low, it is important to distribute the income in the essential products and services.
Need money during inflation? Count on OneBlinc!
Now, you don’t need to worry about “what is inflation?” anymore. If you want to learn more about economics, keep scrolling through OneBlinc blog. Here, you have all the information and financial help with the best loans. With our options, you can face inflation and ease your difficulties!
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