What is inflation?
inflation is the percentage increase in prices over a specific period—usually measured yearly.
Inflation affects the purchasing power of your money. For example, if you used to spend $100 a year ago to buy your household needs, and inflation increased by 5%, you’ll now need $105 to buy the same things.
Governments around the world constantly work to fight inflation. In fact, back in 1974, U.S. President Gerald Ford declared inflation as “public enemy number one,” and since then, every election campaign has included promises to tackle inflation.
Does that mean inflation is always bad for the economy?
Not exactly.
In some situations, inflation is actually helpful for keeping the economy moving.
Imagine living in a country where prices go down every day (a situation called deflation). You’d probably delay buying things because you expect them to be cheaper tomorrow. But if everyone does that, the economy slows down, and growth stops.
That’s why economists believe a moderate and predictable level of inflation is good—it keeps the economy running smoothly.
Also, inflation can have both winners and losers. For example, if inflation is 5%, people on fixed incomes will suffer because their money buys less. But someone who took a loan with a 5% interest rate ends up paying 0% in “real interest” since real interest = nominal interest – inflation. In this case, inflation worked in their favor.
Inflation isn’t always bad. A predictable and manageable level of inflation is necessary for a healthy economy. What we need to worry about is very high inflation that spirals out of control and severely weakens people’s purchasing power.
What Causes Inflation?
We can group the causes of inflation into three main categories:
- Monetary and fiscal policies (central bank decisions and government spending)
- Demand-side factors (when people want to buy more than the economy can supply)
- Supply-side factors (when production becomes harder or more expensive)
Learn more about supply and demand.
Let’s break them down:
1. Monetary and Fiscal Policies
When central banks print too much money or reduce interest rates too much, the money supply increases faster than the economy’s ability to produce goods and services. This leads to inflation.
For example, during the COVID-19 crisis in 2020, the U.S. government gave out stimulus checks, increased public spending, and cut interest rates to avoid a recession. People suddenly had more money to spend, but factories couldn’t meet the increased demand right away. This mismatch led to price hikes, and inflation rose to nearly 10%—a very high and harmful rate.
2. Demand-Side Inflation
Sometimes inflation happens because of consumer behavior.
For instance, if wages go up and people have more money, they’ll start buying more. But if production doesn’t increase at the same pace, the extra demand will push prices up.
Or, if people expect prices to go up in the future, they’ll rush to buy things now. That sudden surge in demand can also cause inflation. You can learn more about this point form this article Who’s Responsible for Rising Prices — The Merchant or the Market?
3. Supply-Side Inflation
Inflation can also happen when the supply of goods and services is disrupted.
This might be due to rising raw material prices, supply chain problems, natural disasters, or labor strikes. When companies can’t produce enough to meet demand, prices go up.
How Do Governments Fight Inflation?
Governments and central banks have tools to control inflation—mainly by adjusting interest rates or changing public spending.
If inflation is too high, they might raise interest rates to slow down borrowing and spending. Or they might cut public spending to reduce demand.
How Can You Protect Yourself from Inflation?
Now that you know what inflation is and what causes it, here’s how to protect your money from losing value over time:
1. Don’t keep too much idle cash
Money loses value with inflation. Don’t just save it under your mattress.
Keep an emergency fund, but invest the rest.
2. Invest in the stock market
Stocks are one of the best tools for growing wealth. Historically, stock markets have gone up over time. Investing regularly can help you beat inflation.
3. Buy real estate
People always need homes. Real estate tends to increase in value over time. If you can, buy a property and rent it out—it can generate income and protect your wealth.
4. Own inflation-resistant assets
Gold is a classic example. In times of crisis, gold often keeps its value and even gains. It’s smart to have some gold as a hedge against inflation.
Final Thought:
Inflation is like a silent tax—it slowly eats away at your money’s value. But with the right strategies, you can protect yourself and even benefit from it.
Always remember: inflation is your number one enemy—unless you’re prepared for it.
sources:
What Causes Inflation and Price Increases?
