Inflation concept is one of the most financial phenomena affecting economic and social systems. This article will explain the meaning and types of inflation, and will explain the effects of inflation on countries and individuals, then solutions to treat inflation or reduce its damage.
Financial or economic inflation is a social and economic phenomenon whose emergence is related to a decrease in the purchasing power of a particular currency over time. The quantification of the rate at which this decrease in purchasing power occurs is reflected in the increase in the average prices of some goods and services during a given period of time.
This rise in the general price level, which is often expressed as a percentage, indicates that a currency is actually buying less than it was buying in previous periods. This phenomenon can be compared to deflation, which occurs when the purchasing power of money increases and the prices of goods fall.
What is the meaning of Inflation concept?
While it is easy to gauge the price changes of individual products over time, human needs go beyond one or two of these products. Humans need a large variety of products as well as a wide range of services to lead a comfortable life, and they include a large class of goods such as food grains, minerals, fuels, utilities such as electricity, transportation, and services such as health care and entertainment. Inflation concept is used to measure the overall effect of price changes for a variety of products and services and allows a single value to be represented by the increase in the level of prices for goods and services in the economy over a period of time.
The meaning of Inflation concept can be summarized by saying that when a currency loses some of its value, prices rise and its purchasing value decreases, which means that the consumer will be able to buy fewer goods and services than in the past. This decrease in purchasing power affects the general cost of living for the general public which ultimately leads to a slowdown in economic growth. The consensus view among economists is that sustained inflation occurs when the growth of a nation’s money supply exceeds economic growth.
To combat inflation, the relevant authorities take the necessary measures to manage the money supply and credit to keep inflation levels within permissible limits and to keep the economy running smoothly. Monetary theory is a popular theory that explains the relationship between Inflation concept and the money supply of an economy. An example of this is that in the aftermath of the Spanish conquest of the Aztec and Inca empires, huge amounts of gold and silver flowed into the Spanish and other European economies, increasing the money supply.
This led to a decrease in the value of money, which contributed to a rapid increase in prices. Inflation is measured in several ways depending on the types of goods and services being considered and is the opposite of deflation which refers to a general decline in the prices of goods and services when the rate of inflation falls below 0%.
After we know the meaning of inflation, let’s move now to some examples of Inflation concept and ways to measure it.
Examples of inflation
You can get your hands on a wide variety of examples of inflation in your daily life. For example, think of a commodity that you used to buy for a certain price, but now you are getting it for a slightly higher price than it was before. This rise in the price of this commodity is a manifestation of inflation.
Sometimes you may think that this increase in the price of goods, which occurs over time, is due to the scarcity of milk or the high cost of making it. In fact, and more correctly, this increase in prices occurs due to the decrease in the value of money due to inflation.
How do I measure Inflation concept?
Consumer Price Index (CPI)
One of the scales used to measure Inflation concept. This index tracks fluctuations and increases in goods and services across a wide range of sectors, including transportation, gas, healthcare, food products, housing, and education. The Consumer Price Index tracks inflation rates, along with their impact on the cost of living and purchasing power. These numbers help statisticians and economists understand the overall health of the economy.
Producer Price Index (PPI) : Inflation concept
This indicator is another way to measure Inflation concept. It tracks price changes and how they affect producers, including agricultural, livestock, chemical, and metal products. This is because the increase in these prices will lead to a transitional increase in selling prices to the consumer.
Wholesale Price Index (WPI)
The wholesale price index is another method of measuring inflation, which measures and tracks changes in the prices of goods in the pre-retail stages. While the items used for measuring WPI vary from country to country, they often include items related to product or wholesale. This includes, for example, the prices of raw cotton, cotton yarn, gray cotton goods and cotton clothing.
The effects of financial Inflation concept
Inflation concept is not a new phenomenon. It has been around over the years and attempts to study and study its effects on a large scale have been in place ever since.
In the following, we will present to you the most important negative and positive effects of inflation on the economy and societies.
negative effects of Inflation concept
Money losing its value
This effect is considered one of the most negative effects of Inflation concept because, with the increase in the prices of products and services, money loses its value.
For example, if you keep a dollar under your pillow for ten years from now, you will not be able to buy what you can buy with it today because of inflation.
If we look at the value of the US dollar, for example, between 1980 and 2022, then we can see that the dollar has lost more than half of its value.
In other words, today’s dollar will enable you to buy half of what you could have bought with one dollar years ago, with its value declining over time.
As a result of declining purchasing power, the Inflation concept causes consumers to try to find a return on their capital.
Instead of leaving money under the mattress, or in low-interest bank accounts, it incentivizes consumers to find better returns. This is lest the money saved will become worthless over time.
At the same time, inflation creates greater pressure on companies to invest any surplus capital because any money that is not used loses value if it is not put to use in some way with the Inflation concept whether it is in the stock market or any other form of investment.
Inflation can hurt lower-income families the most. They usually spend more than their income, so price increases usually take more of their income.
For example, when the price of necessities such as food and housing rises, the poor have no choice but to pay.
Increasing the price of food items by $10 a week, for example, has a more profound effect on a person who earns $12,000 a year, than a person who earns $50,000.
One of the most important manifestations of the Inflation concept is that asset prices tend to rise. Assets like housing, stocks, and commodities like gold tend to outpace inflation.
This increases inequality because wealthier families are able to own more assets. In other words, the prices of these assets tend to rise before ordinary goods such as bread, milk, eggs, etc.
As a result, they end up with wealth that can buy them more goods and services than before. Whereas lower-income families have to spend more to get by.
People with lower incomes tend to spend a higher proportion of their income, so they have less money set aside for the purposes of saving and investing in stocks, bonds, and other assets.
Furthermore, they are unlikely to be able to invest in a high capital expenditure such as a home. The result is that those who are able to invest some of their income in “inflation-protected” assets such as stocks.
High borrowing costs
High borrowing costs are one of the most severe effects of inflation on consumers from the poor or low-income classes. If you take out a $200,000 mortgage, you have to pay back that amount plus the interest rate.
This loan may be for more than 25 years, at an interest rate of 5 percent. The total cost to pay in over 25 years would be more than $345,000.
Sometimes, consistent and high levels of Inflation concept may cause financial institutions to increase their interest rates in order to protect themselves from inflationary pressures.
Conversely, debtors may find it difficult to obtain loans afterward.