You ever realize the price of goods and services are generally more expensive in the future? That seems really unfair! Why should I pay more for a product just because I didn’t buy it last year?
This my friend is known as inflation, which is the sustained increase in the general level of prices for goods and services in a country. For example, if the inflation rate is 2% annually, then theoretically a $100 phone will cost $102 in a year. As a result, a consumer’s purchasing power will decrease.
Purchasing power is the value of a currency expressed in terms of the amounts of goods or services that one unity of money can buy. As inflation raises, purchasing power goes down. That’s a simple correlation. However, there are many unforeseeable consequences to this. For instance, this will lead to a higher cost of living, high interest rates, and falling credit ratings.
You must be wondering what causes inflation. There are two theories that are generally accepted by economic nerds. Demand-pull inflation and cost-push inflation.
Demand-pull inflation theory simply says too much money is chasing too few goods. If the demand for a product is higher than supply, then prices will increase. This is most popular in growing economies. The graph below will give you visual understanding on the matter.
On the other hand, cost-push inflation simple says if business input costs rise then product prices will also rise. This is due to businesses’ desire to maintain their profit margins. The most common ways input costs increase are higher wages, taxes, and import costs. The image below shows you the graphical representation of cost-push inflation.
If you were following the markets this week, the Consumer Price Index (CPI) rose 0.2% last month. The CPI is an economic indicator that measures the average price of household goods and supplies. This is the most common indicator used by economists to measure inflation.
The results basically told you are paying two hundredths of a penny for all your goods. This may not seem a lot, but money adds up quickly when you make multiple purchases throughout the month.
All in all, try not to let your lowered purchasing power ruin your day.