Inflation and how it can affect you
What is inflation?
In today's rough economic times, inflation tends to be a word that is heard more often than in the past. While there is little doubt about its effects on our economy its also quite common for many people to not fully understand what happens when inflation occurs, and more importantly inflation's effect on our everyday lives. Hopefully this article will shed some light on what inflation is in a simple, easy to understand way.
To put in simply, inflation happens when money loses its value over time. It is generally caused when prices rise or when supply exceeds demand. This usually occurs during hard economic times when a government produces more money as an attempt to spark more consumer spending. This can cause an increase price of goods and products. When discussing inflation people often refer to CPI or Consumer Price Index which measures changes in retail prices.
Purchasing power of a dollar tends to fluctuate constantly when there is inflation. The value of currency is usually measured in terms of purchasing power of real tangible goods that money can buy. When inflation goes up your money's purchasing power goes down and inflation often has damaging effects on an economy. Uncertainty about future inflation can discourage people from investing and saving. High inflation rates can also lead to shortages of goods if consumers begin hoarding out of fear that prices will continue to rise.
In ancient times, inflation originally referred to the oversupply of a nation's currency. Back in the days when gold was still used as money, gold coins were often melted down and mixed with other metals such as silver, copper or lead, and then reissued at the same value. By diluting gold with other metals, the government realized it could increase the amount of coins issued without necessarily needing to increase the amount of gold used to make them. When the cost of each coin is lowered in this way the supply of money increases but it also decreases the value of each coin. As value decreases, consumers need more money to exchange for the same goods and services. As a result, goods and services cost more, and your money is worth less and less.