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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