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July 18, 2018

What Does Inflation Really Mean?

What Is Inflation?

Simply put, inflation describes a lowering in the buying power of our currency. It is a long-term, widespread increase in the cost of goods and services, which then in turn means that our money doesn’t go as far.

What Causes Inflation?

There are several causes of inflation, and certain factors that may lead to an increase in inflation will affect the overall rate differently at various times. Here are a few reasons inflation may occur in layman’s terms, though there are several more potential reasons according to various schools of economics.

A Growing Economy

It makes sense that when the economy is doing well that people are making more money. This means that people have more money to spend and they are more able to buy things, creating more of a demand for goods and services. When goods and services are more in demand, the companies or people offering them are able to charge more. When this scenario is sustained, inflation occurs.

On top of the supply and demand inflation creator above, when the economy is doing well and people expect inflation to occur, they tend to make the choice to buy the things they need or want now rather than later when they expect their purchases might be more expensive. This, sort of ironically, drives inflation, as well.

Low Unemployment Rates

This one falls under the category of a growing economy as well. When companies are doing well, they’re able to employ more people. When more people are employed, more people have the cash to afford goods and services, which drives up demand.

Another reason low unemployment may lead to inflation is that when there are more jobs, workers are more in demand and this generally means that they can demand higher wages, leaving themselves with more income.

How is Inflation Measured?

Inflation is generally related in terms of the amount of goods or services a dollar can buy you at a given time. The inflation rate is often described in an annual percentage increase.

The Federal Reserve sets a 2% target inflation rate, which ideally doesn’t exceed the inflation that people expect, but yet still leaves room for prices to increase slowly.

Is Inflation a Good Thing?

Inflation, in moderation and in theory, at least, is actually a good thing. It means that the economy is growing and should ideally signal that finances are better across the country. Conversely, deflation, or when the prices of goods and services go down, is harmful to the economy.

However, current figures and those of the past several years show that wages aren’t increasing as fast as the prices of goods and services, leaving the average American in a lurch despite a “booming economy”.

Has Inflation Negatively Affected Your Financial Situation?

For many people, the current level of inflation combined with wages not increasing proportionally to said inflation means that it’s getting harder and harder each year for them to afford the things they did the year before. If you’ve found that your current lifestyle is no longer sustainable because everything costs more but you’re not making any more, consider learning more about Sell and Stay, to see if it could be the answer to your problems.

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