Inflation 101: Understanding the basics

Inflation is a vital asset one needs to consider before making any investment. You may have heard about it from financial news sites or a professional financial advisor. But do you know what inflation exactly is? Or why do you even need to care about it? If not, then you are at the right place. This guide will share an ultimate guide on inflation.

What exactly is inflation? 

Inflation is a financial concept. It usually refers to a general price hike which can be for a product or service within a specified economy. This price hike is directly linked to the gradual erosion of purchasing power.

For instance, the price of a mango was $10 last month when you thought about buying it. But now one month later you find it is $15 as the price has increased within a month. In this case, inflation is $5 which has affected the power of $10 to buy a whole mango.

When does inflation occur? 

Inflation occurs when prices rise within a specific economy. The primary cause of inflation is a change in the money supply. Several other factors cause this price hike. Below, we will discuss them in detail –

1. Legally reducing the value of the legal tender currency.
2. Printing and distributing money among the citizens.
3. The government loans new money on the existing one by purchasing legal bonds from banks.

Why do you need to care about inflation? 

Learning about inflation before making any investment is essential to ensure more return than the inflation rate. Here are some essential reasons why you need to care about inflation –

1. Inflation will increase the market of a product or service leading to your increased investment in the product to buy it.
2. Inflation can reduce the money value saved in an asset or currency. It will lead to a significant financial loss.

Ways to control inflation 

Inflation is associated with a price hike within a specified economy. However, there are a few ways to control the impact of inflation –

1. Monetary policy

   The government is responsible for implying this crucial method. They usually employ central banks or other committees to decide the growth rate and size of the money supply.

2. Maintaining stability in price hike

   Authorities maintaining strict stability are also an essential move in controlling inflation. When authorities avoid irregular price hikes, it also shows in the inflation rates.

3. Exceptional measures for financial crisis

   The government taking responsible and exceptional measures during the financial crisis also helped in keeping the inflation rates low.

Examples of inflation 

Inflation can be distinguished into different types. Here are some common types of inflation you can witness –

1. Demand-pull inflation

   Demand-pull inflation refers to the price hike based on the demand for a specific product or service within a specific economy.

2. Cost-pull inflation

   Cost-pull inflation occurs when demand-pull inflation is at its peak. In such conditions, businesses need to increase the price irrespective of their demand.

3. Built-in inflation

   Built-in inflation occurs when too many people except the inflation will continue to rise. Based on this expectation workers may demand higher wedges.

Conclusion

Inflation is a crucial part of financial investments. It affects the power of purchase and price of an asset. Learning about inflation and ways to control it helps you prevent unwanted financial loss.