We’ve all heard of the term “inflation”. We also know that sudden or long-term inflation can have a negative effect on the global economy. But what is inflation? And is it just the world governments that have to worry about it or does inflation also affect the individual citizens?
The global economy is based on a delicate balance of supply, demand, and consumption of goods and services. However, this balance may sometimes become vulnerable due to a number of aspects.
To help you better understand the nitty gritty, we’ve compiled a useful guide filled with all the essentials.
What is inflation?
The steady rise in prices of everyday goods and services over a period of time is known as inflation. As time moves forward, the value of money goes down.
This is due to the gradual increase in prices of essential goods and a decrease in the amount of goods that could be bought with a certain amount of money.
Inflation can be easily understood by a simple illustration. The value of 1 USD has remained the same but its purchasing power has drastically reduced.
All the things that could be bought with 1 USD a few decades ago cannot be bought for a dollar anymore. Why? Because the price of that commodity increased, yet the currency’s value remained unchanged.
Inflation is unavoidable as the world progresses. Yet, it’s not always negative. A healthy inflation rate increases the cost of living over time, but it also prevents unemployment and increases income.
On the other hand, a sudden boom in inflation may lead to steep rise in everyday essential products, housing, and services. This is hyperinflation and may be extremely detrimental to the global economy. Let’s prevent having to wonder what is inflation…
How Inflation Works
With time, the average price of commodities and services increases. This rise in prices over a certain period in an economy is known as inflation and is measured with the Consumer Price Index.
The prices of goods may increase due to an overall increase in wages, raw material, and production costs. These factors go up with time to adjust to inflation and they also promote a healthy inflation rate. So production, demand, and supply are interrelated in an inflating economy.
Inflation is inversely proportional to the purchasing power of money. As inflation occurs, the value of money or the amount of product it can buy decreases.
If the average prices of goods and services went up by 4% in one year, then the rate of inflation would be measured at 4%. Inversely, the purchasing power of money would have gone down by 4%.
A healthy inflation rate increases the cost of living over time, but it also prevents unemployment and increases income.
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Effects of Inflation
Inflation does not only affect world trade and economy, but it also affects our everyday lives and living costs. The effect of inflation across products and services is not equal. Some products may have a slight increase in costs while other goods’ prices may increase drastically.
It’s obvious that your monthly income from a decade ago would be severely lacking in keeping up with your present cost of living.
At a personal level, an individual’s living cost goes up with time, but healthy inflation makes up for it by adjusting the living wage accordingly.
People must also take their savings into account. Due to inflation, your saved capital will lose its value several years down the road. It also applies to people’s retirement plans.
It’s why a majority of people choose to invest their capital. By doing this, their saved money also increases as per the inflation.
Walking inflation, when rates increase 2-10% per year, can make a huge difference in a nation’s economic growth. This is why governments around the world set inflation targets for a particular year.
The inflation then translates to how much the nation’s economy has expanded. Controlled inflation improves the citizens’ lifestyle, increases wages, and provides more employment opportunities.
However, massive inflation will have a negative effect on the same.
Inflation at the global level may lead to a long-term financial crisis. It’s very hard to bounce back from global inflation as it further leads to domestic inflation. Foreign exchange may also be affected as currency values around the world get severely hit.
Inflation in the Past, Present, and Future
The worst inflation period the global economy has ever seen arrived post-World War II when Hungary faced an inflation of 41.9 quadrillion percent. The Weimar Republic in the 1920s suffered the most infamous hyperinflation, which led to great political instability.
Currently, the economies of several countries like Sudan, Lebanon, and Venezuela are undergoing inflation. This has reduced the standard of living of its citizens and caused unrest among the masses.
A steady global inflation rate of 3.05% has been predicted for the year 2026. This means that the global economy will most likely remain stable till that year and hopefully onwards. It may however be affected due to extreme cases like wars or calamities.
In a Nutshell
One can never be certain about the occurrence of various economic phenomenon. Similarly, we can never foresee what will happen in the future, but we can take precautions to secure our loved ones and ourselves.
At Quotacy, we understand the importance of being able to provide for your loved ones. One of the most important financial tools you can have is term life insurance. It’s essential for keeping your family’s way of life in balance, especially if they depend on your income.
If you’re ready to see what you’d pay for life insurance, start with a free quote today.
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This article is for general educational purposes only and is not written by a financial advisor.
About the writer
Director of Creative Strategy
Greg is Quotacy’s Director of Creative Strategy. He has an eclectic past from working on movie scripts to creating ad campaigns for major brands. His love of creative solutions drove him to strategy, and he now uses his powers to help families protect their loved ones. Outside of work, Greg spends his time off the grid hunting, fishing, camping, biking, hiking, and walking his dogs.