What to know about inflation.

 

What Is Inflation?

Inflation reduces the purchasing power of money (purchasing power, the quantity of goods bought by an amount of money).

 Inflation reduces the purchasing power of money in a growing economy by triggering rising prices of consumer goods and services.

`A slow and steady rising of prices caused by an inflation rate of at about 2% is okay. But when the rate rises faster, sometimes to double digits, then it can have a negative impact on personal financial management.

For instance, as a consumer, you would be time consuming to compare and determine best prices to get goods and services at a given moment.

How is inflation measured?

Inflation is measured by using the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCI) tools. 

The Consumer Price Index tracks prices for individual goods and services which households are buying. 

The Personal Consumption Expenditures, PCE, tracks changes in prices of consumer goods and services which businesses are selling.

The CPI reports a higher inflation rate than PCE but the PCE is considered the more reliable indicator.

What are the types of inflation?

The three main types of inflation are the demand-pull inflation, the cost-push inflation,    and the built-in-inflation.

The demand-pull-inflation is an economic situation where the demand for goods and services drive up their prices. Consumer demand pulls up prices when quantity supplied falls below quantity demanded. 

The cost-push-inflation occurs at the peak of demand-pull-inflation. It is an economic situation where increase in costs of raw materials is transferred to final consumers through increase in retail prices. 

The built-in-inflation occurs as a result of increase in wages or salaries and increase in prices of consumer goods and services. The consequence of demand-pull-inflation and cost-push-inflation, which is, increase in prices, affect all consumers including workers. To continue to afford basic goods and services, these workers are going to ask for a pay raise. When this request is granted, a built-in-inflation occurs.  

As a consumer, what should you do during inflation?

Have a good budget and stick to it. Your budget should include provisions for timely settlement of debts and investments in commodities, gold, silver, equities and real estate.

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What Is Project Cost Management?

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Thorough project management knowledge, skills and techniques are necessary for the successful execution of a project from iniatiation to closing. 

One of the tools for a successful  project execution is an effective project cost management.knowledge.

Project Cost Management includes necessary techniques or processes for the completion of projects within approved budget.

These processes are estimation of costs, determination of budget and control of costs.

1. Estimation of costs -

The establishment of monetary resources required to successfully complete a project is crucial.

Some of the techniques used to estimate costs include 

a. parametric estimating - the parametric cost estimates are calculated by using the relationship between historical data and other variables such as cost, budget and duration.

b. reserve analysis - cost estimates sometimes include reserve analysis- this analysis is relevant to cost estimates that contain cost uncertainty. 

The uncertainty is accounted for by including contingency reserves or allowances in cost estimates.

Contingency reserves are often required as part of funding requirements.

c. analogous estimating - this techilnique uses values obtained from scope, measures of scale, budget and duration. The technique relies on historical costs of similar projects done in the past, to make estimates for a current project.

There are other tools such as expert judgement and the bottom up estimating 

2. Determination of Budget.

Budget determination  is a process that aggregates cost estimates of activities to establish an approved baseline. 

The established baseline would include authorized budgets (standards for assessing project cost performance) and exclude reserves made by management.

Some of the tools used to determine project budgets are expert judgement and budget reserve analysis.

a. Expert judgement is made on the basis of expertise in industry, knowledge of the project area and relevant experience.

b. Budget reserve analysis is used to establish both managment and contingency  reserves for a project. 

Contingency reserves as pointed earlier, are necessary because sometimes during project execution, some unplanned changes may become necessary. 

3. Cost control.

This is the process of monitoring a project, updating the budget when it's necessary and managing changes to baseline.

Some of the techniques used are forecasting, performance reviews, Earned Value Management and variance analysis and To-Complete Performance Index (TCPI).