Inflation
Inflation means that over time, the money you have - buy less because prices for goods and services are going up.
Inflation exists if there is a general increase in the prices of goods and services and not just some individual items. In periods of high inflation, people's purchasing power decreases. In other words, the same amount of money can buy fewer and fewer things.
The decrease in the value of money is measured by the "basket of selected goods".
What Causes Inflation?
Inflation can be caused by internal or external factors – economic factors, political uncertainty, international conflicts, etc. However, the causes can be put into several categories: demand, spending, monetary factors, and external influences.
Demand may be the reason for the increase in prices: When the economy is growing incomes also increase, so consumers naturally have more money willing to spend. That leads to higher demand, which can outgrow the supply and potentially lead to higher prices of goods and services.
Higher production costs: Logically, this can increase the prices of goods and services. This includes higher prices for raw materials, energy, or labor. When manufacturers face higher costs - they may respond with adjusted finished product price.
External influences: Different influences like: politics, conflicts, and regulations can also affect inflation. An easy example is the price of oil – when prices increase globally, this can cause energy prices and transport costs to rise which could have an avalanche effect and lead to inflation.
How is inflation regulated?
The central banks are responsible for monitoring and regulating inflation. They manage to control prices through their currency and lending policy. In periods of higher inflation, central banks raise the key interest rate, which in most cases leads to higher interest rates on credit products for businesses and individuals.
Higher interest means more expensive credit. That naturally lowers demand and consumption.
Meanwhile, in times of low consumption, the central banks have the power to print money that contributes to currency depreciation while stimulating the buyers.
Moderate inflation is healthy for the economy. It shows a development - increased production, income, and consumption.
General tips in times of inflation
In times of high inflation, it is a good idea to aim for an increase in income, not to hold too much cash, but to invest it. It is a good idea to rely on a diverse portfolio to manage the risk. Additionally, it is always a good idea to consult with an investment broker or financial consultant before taking a step in a field you do not know.
Another important thing in times of inflation is access to funds in case of emergency. Borrowing can be out of sight so the extra money can give a peace of mind in unexpected financial situations.
Inflation exists if there is a general increase in the prices of goods and services and not just some individual items. In periods of high inflation, people's purchasing power decreases. In other words, the same amount of money can buy fewer and fewer things.
The decrease in the value of money is measured by the "basket of selected goods".
How is inflation regulated?
The central banks are responsible for monitoring and regulating inflation. They manage to control prices through their currency and lending policy. In periods of higher inflation, central banks raise the key interest rate, which in most cases leads to higher interest rates on credit products for businesses and individuals.
Higher interest means more expensive credit. That naturally lowers demand and consumption.
Meanwhile, in times of low consumption, the central banks have the power to print money that contributes to the depreciation of the currency but also stimulates buyers.
Moderate inflation is healthy for the economy. It shows a development - increased production, income, and consumption.
General tips in times of inflation
In times of high inflation, it is a good idea to aim for an increase in income, not to hold too much cash, but to invest it. It is a good idea to rely on a diverse portfolio to manage the risk. Additionally, it is always a good idea to consult with an investment broker or financial consultant before taking a step in a field you do not know.
Another important thing in times of inflation is access to funds in case of emergency. Borrowing can be out of sight, so the extra money can give a peace of mind in unexpected financial situations.