Inflation: What You Should Know?

Inflation in its simple term is the general increase of prices of every commodity, most especially household and basic necessities. But inflation is not limited to this only, it includes all commodities you find the market in general and in every industry. Inflation is like a Kryptonite to your money as it renders your money powerless overtime. As one of the outsets, cost of living increases.

How does Inflation work?

Well, you look no further if you want to gauge inflation at face value. If you’ve been into a regular grocery for personal household needs and you notice that your grocery basket either becomes smaller or lighter but the price you pay is almost the same or even costlier than expected, then what you are actually noticing is the after effects of inflation – plain and simple!

Again, inflation is the rise of the prices of commodities and not necessarily the intrinsic physical value with it. Imagine buying a kilo of banana at $2. Couple of years later, same banana – same taste, color, size, nutrition information and same store where you bought the stash, now at $4 per kilo.

Now that’s inflation for real!

Source: Freepik

Economically, there are lots of factors that encourages inflation. Few of those are supply and demand disequilibrium. As for the types of inflation, which I bet you might not know yet, so do I, are Cost-Push Inflation and Demand-Pull Inflation.

So what are these types of inflation is all about. Cost-Push inflation happens when business production cost rise such as the raw material cost, production cost and wage hike increase. While Demand-Pull inflation happens when demand overwhelms production of goods. So, to counter this imbalance, companies tend to upscale the prices instead of reeving up production. However, if it happens that there is an oversupply of money in the market and consumer will obviously willing to pay the price, this will then further elevate the price of commodities.

Cost-Push Inflation

If the overall production cost of goods increases, the output of the production will be coupled with increased price tags. This is simply letting the consumer bare the burden. Business is business, the industry just needs to recoup what needs to be recovered to continue producing.

Source: Freepik

Cost of necessary materials increases

In other words, raw materials. An increase in the raw materials used in the production will have a gross impact in the price of the commodities later on. This even includes electricity, petroleum, logistics, machine spare parts and all – all these collectively cooperates in the increase of prices of the commodities.

Labor Cost

Labor Union, Strikes, Wage Hikes, Skill-To-Pay ratio takes a toll to the economic sanity of a company. No worries, as this cost are just being passed on to consumers. However, this cannot go on and on. If inflation keeps rearing its ugly head exponentially, consumer will not be able to buy heightened commodities. Companies in turn takes the backfire of their goods not able to sell and under the weight of its own liabilities and overheads, companies fold-up.

Foreign Exchange

Foreign exchange is one country’s money over the other. If a country’s money drops in value over other country’s money – it takes more money to buy goods that is only available in that country. In short, this can cause inflation as businesses will again charge the added expense to the consumers.

Taxes

Decisions on VAT increase or any additional tax charges obviously increase prices of commodities. At the same fashion, businesses let the consumer bare the burden of price increase again.

TRIVIA

Money Velocity
Do you know that the faster the money is being circulated over a short period of time also causes inflation. For example, if the same unit of money, say $10, has been spent rapidly in three unique transactions in a year, the velocity of that money is three. And if the supply of money as well as its velocity goes on, goods and services will not be able to keep up with the demand since there are more money chasing fewer goods. To counter the other side of the balance, companies increase prices. This phenomenon happens when money supply suddenly increases due to some monetary policies by the government.

Note that this doesn’t always happen. If confidence for the economy is lower, then banks tend to mitigate loans, people and business hoard rather than spend. This, in turn, slows down money circulation. Thus, slowing down inflation.

Supply Manipulation
Mischievous companies more in particular, suppliers, importer, exporters can manipulate supply and demand in the market to elevate prices of goods most especially basic necessities. Limiting supplies with the purpose of increasing prices contributes to the increase of inflation.

Demand-Pull Inflation

Who doesn’t want economic expansion? But if expansion becomes unsustainable for everyone, then another economic downturn takes toll. This happens during increase money supply and circulation done perhaps by some economic policies. Increase in money supply will enable consumers to demand and buy more.
Source: Freepik

Monetary Policy

This leads to inflation due to cut in interest rates, easing of loan restrictions. These results in more borrowing and therefore more spending.

Government Spending

Increase spending by the government increase money supply and therefore encourages consumer buy and sell activity.

Lower Taxation

Lower and abated taxation can result in increased income and therefore exponential spending.

Consumer Confidence

With consumer confidence and affirmative impression of the future, they become more encouraged to spend resulting in more demands for goods and services.

Export Sales

Affirmative overseas export sales increases money inflow into the country giving business and consumers more purchasing power to spend at will.

Note however that inflation is not bad at all. Yes, not bad at all times. Government can summon healthy inflation to reeve up production if industrial production is slacking off. Projected inflation can also be used to generate productivity, increase, labor, encourage exchanges of goods and services – all and everything for the growth of the economy.

However, too much of this good thing can kill the economy and will give the exact opposite of what was listed above. So, the secret to life here is balance. Not too low, as no inflation at all will cause to slow down economic productivity and too much of it will burn it down as well.

Source: Freepik

If you are living in a country where inflation means the dark side of the spectrum, then you might need to know how to beat inflation. But to beat inflation you need to know basics of investing. These Top 10 Things To Do Before Investing A Single Dime will get you your first clear cut before you invest. Additionally, knowing Top Investment Risks will make your eyes wide open for any investment hurdle you will encounter later on.

And lastly, about inflation – it is there to either make the economy or break it – same goes with your personal economy.

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