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What Is Inflation And Why Does It Matter?


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Inflation is basically the rate at which the prices of goods and services increase in an economy. Inflation refers to the decline in purchasing power of a currency which means a decrease in the value of a currency over time. The opposite of inflation is deflation which refers to a decrease in the prices of goods and services and an increase in the value of a currency over time.

Inflation is neither good nor bad for the economy; it is often a sign that an economy is recovering. Many central banks around the world try to keep the inflation rate around 2-4% every year, which is healthy for the economy, however, this is not always in the control of central banks since many factors have a say over the rate of inflation in an economy.

During periods of high uncontrolled inflation, the governments set the prices themselves and pay subsidies to producers in order to reduce the rate of inflation. But most central banks prefer to manage long-term inflation by managing and fulfilling the economic expectations.

Why Does Inflation Matter?

Now that we have mentioned briefly about inflation, the question arises, “Why does inflation matter?” Well, the answer to this question is that when the prices of goods and services increase then the purchasing power of an individual decreases due to which he is unable to get the goods and services that he used to get for the same money. Inflation has an impact on the whole society because everyone, rich or poor is affected by it. Here are some reasons why inflation matters and you should care about it:

The Prices Of Consumer Goods And Services Increase

Inflation results in the prices of goods and services increasing which mean that goods and services get more expensive. Inflation or increase in prices occurs across all sectors, whether it is the housing sector, medical & health, food, transportation, or any other. When inflation occurs across all the consumer sectors the prices of products and services that you use on a daily basis are increased. For example, Philippine Government run PSCO’s Lotto Result and Lotto 6/42 had increased the average ticketing price during the high inflation of the country.

So, when inflation occurs then the general population has to face the problem of the increased pricing of consumer goods and services. Inflation must not be confused with the increase in prices that occurs because of supply and demand. Inflation occurs across all the sectors and it results in the prices of almost every consumer product increasing, just as we saw the increase in the prices of FMCG products after the covid because of an increased rate of inflation in India.

Your Salary May Not Increase with The Increasing Rate Of Inflation

Another reason why inflation matters is that the prices of consumer products and services might increase but your salary and wage may not increase in the same manner. The problem with this is that if the rate of inflation keeps on increasing and the salary or wage doesn’t increase in the same percentage then it becomes hard for people to keep up with the rising costs of products and services.

When wages and salaries are not increased while inflation continues to increase due to various reasons, then it makes it difficult for people to sustain their lifestyles or keep up with the increasing cost of living. This ultimately puts the burden on the consumers who then have to cut up on their spending, find an additional job, or make an investment in order to keep up with the increasing costs of basic goods and services.

In short, when the rate of inflation keeps on increasing and the wages & salaries don’t rise then it affects the lifestyle of citizens and puts a lot of burden on them.

Inflation Affects Your Portfolio

Inflation can also have an impact on your savings and investments. As the rate of inflation of an economy increases, the value of domestic currency decreases, and in our case, the value of the Indian rupee also decreases. If the rupee has less value then your overall bank balance and portfolio also have less value because of the devaluation of the currency.

Fortunately, there is a way to safeguard your money and savings against inflation by investing in assets like gold, property, shares, and other commodities whose value increases over time despite the increasing rate of inflation in society.

Investing in alternative assets reduces the impact of inflation on your portfolio and keeps the value of your money the same, whether inflation increases or decreases in society.

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