All about inflation

What is inflation? The economy has been in continuous motion since civilization began its first exchanges. Since then and to this day, new products and services are constantly emerging, so prices vary from one period to another.

These goods can be acquired thanks to the official currencies of the various nations or supranational entities, for example the euro in the European Union.

In this sense, all countries have different parameters for analyzing the evolution of their economy and the phenomena that occur in it. One of the most common is inflation, that is, the general increase in prices that leads to a decrease in the purchasing power of people, reducing their purchasing power and their savings.

Let's go

🥀 What is inflation in economics?

We can define inflation as the increase in prices that occurs in goods or services over a certain period of time. It can also be defined as the depreciation of the value of money. The higher the inflation, the fewer goods we can consume with the same amount of money.

The measurement index par excellence is the consumer price index (CPI). This index has a direct impact on the rise in wages, pensions, leases and other concepts that are changed according to the CPI.

🥀 Causes of Inflation

Among the origins of price changes are some of the most common causes that contribute to the effect of inflation. Most important is the imbalance that occurs between supply and demand, due to the fact that many consumers demand rare goods.

However, the same importance must be given to the opposite situation: the excess supply is also negative for a country, since there is no demand to assume it and the opposite effect to inflation occurs, i.e. deflation.

However, the latter case must be controlled because an imbalance could occur in the system if, despite the fact that there is money in the market, the demand does not increase.

🥀 The types or degrees of inflation

Once we have seen the causes that motivate the phenomenon of inflation, we must know the degrees in which it can occur:

✔️ Moderate inflation

This is a slight increase in prices, which does not exceed 10% per year. Here the price increase remains between 2% and 4%, which is above what economists consider ideal for economic growth, but not too much. It is considered that at these levels the central banks have enough weapons to act and bring this level of inflation back into a zone of control.

✔️ Rising inflation

It has a very negative effect on a country's economy as inflation rises to double or triple digits year on year. By lowering the value of money, people focus their consumption mainly on basic necessities.

✔️ hyperinflation

The latter hypothesis indicates that a nation is plunged into a serious economic crisis. According to Steve Hanke, a professor at Johns Hopkins University, in a BBC interview: “By convention, the economics profession accepts that hyperinflation exists when the inflation rate exceeds 50% per month. As a result, the value of the currency falls.

When the significant increase in inflation is accompanied by economic stagnation, there is stagflation: a concept whose definition was invented with the oil crisis of the 1970s with the devastating effect of the increase in inflation accompanied by weak economic growth in several countries.

✔️ High inflation

It is a price increase that exceeds 3-4% but does not reach 10% per year. If it is a temporary phenomenon, as happened at the beginning of 2021 due to the comparative effect with the very hard first half of 2020, it is not a major problem, but if it persists over time, the erosion it produces of savings is also very strong.

🥀 How does inflation affect the economy?

✔️ Inflation at the macroeconomic level

When we talk about the consequences of inflation at the macroeconomic level, the first is obviously the rise in prices. In other words, everything is more expensive as we said at the beginning. We can buy less with the same, which ultimately affects our wallet, as we will see later.

Of course, we must be clear that inflation should not be a term with a negative connotation: low or controlled inflation shows us that the economy of a country is in a good moment of prosperity, since the citizens do not are not losing purchasing power and that people are consuming, among other indicators.

Controlled inflation is considered beneficial for a country's economy, mainly to avoid possible situations of deflation.

✔️ How does inflation affect savings?

As for how inflation affects our savings, we can find different ways. High inflation affects our national economy as we lose purchasing power by having our money “under the mattress”.

That is to say, if our currency stops and inflation increases, it will gradually lose its value: inflation will devour it. This is why we often speak of “ inflation monster ».

When it comes to salaries, the Government generally increases the minimum salary interprofessional when it increases, But it's not always the case. As for wages, when inflation rises, the government usually raises the minimum wage.

And when it comes to lending, we need to keep in mind that when inflation exceeds expectations, central banks raise interest rates to stop it from running amok. Therefore, if, for example, you have a mortgage variable interest, your payment will increase.

If you don't want to lose money with inflation, the solution is to invest. Mutual funds are the best enemies of inflation, since they allow us to obtain a return on our money by preventing it from devaluing over time when it is stopped.

✔️ Other terms related to inflation

• Reflation: the state artificially stimulates the economy to overcome a recession.
• Disinflation: Prices are rising, but less than before, which lowers the rate of inflation.
• Core inflation: It is a more precise data or indicator that reflects the variability of consumer prices in the short term. He leaves aside the instability caused by energy prices, among others.
• Stagflation: Occurs when inflation and unemployment rise at the same time while there is stagnation in GDP during times of economic crisis.