Explaining Inflation
What Does Inflation Mean?
What is inflation? To understand inflation, you need to know what money is and why we use it. Money represents the value of labor and the production of things that others want to use. This output or labor measures in units of money. If you spend $20 to buy a can opener, that $20 represents one hour of work serving food at a restaurant, for example. You can see this by looking at a job that pays an hourly wage. Then take that wage and buy things you don’t produce to get everything you need to survive. The backbone of this concept is the exchange of goods and trade. As it is not possible to produce everything you need on your own.
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People assume that $20 today is worth $20 tomorrow. Not really. The price of things changes constantly, and that $20 value depends on when you use it and what you buy with them. Want proof? See the prices of food, gasoline, education, rent, and utilities. And many other household goods and services over time. Most items go up in price most of the time and this least is a $ 20-a-year buy. To see a complete comparison, in 1920 I bought you a $20 suit, belt, and a new pair of shoes. Today, $20 can only buy you a belt. Inflation occurs when prices rise and more money needs to buy the same quantity and quality of goods. Inflation occurs when the same amount of money buys more goods of the same quantity and quality. This happens with technology, clothing, and online shopping to name a few.
Inflation is also defined as the rate at which prices rise and the rate at which the dollar depreciates. What can you do about this? In the 70s and 80s, it grew every year equal to the rate of inflation or the rate of dollar depreciation. It lets you buy the same things you used to. For example, if you earned $20 an hour in 1970, you could buy 5 liters of milk for $20. Next year, the price of milk goes up to $21, your salary goes up to $21, and you can buy the same amount of milk for an hour’s work. If you are an investor, you can put money in a bank account at an interest rate equal to or higher than inflation. So that you can buy the same or more products with your invested capital. If you are a landlord, you would increase your rent by 5% to offset the 5% increase in costs. So that your property generates the same profit despite rental inflation.
What if you don’t get that growth, or the investment doesn’t return at par with inflation? Reduces the cost of the work you do or the amount of equipment you can buy for your business. The value of investment capital also depreciates over time. If this trend continues for a long time, your business will not allow you to buy more and you will be closer to slavery. Once the capital is so reduced that nothing can buy, it calls bankruptcy.
The solution is to find employment, investments, or assets. That maintains their purchasing power despite inflation. To work, earning a wage that will increase every year. For investment, the yield or growth rate of income must be higher than inflation. As for assets, these would be physical and tangible things. That would be useful regardless of currency value. These resources are always needed by humans. Food, water, shelter, land, productivity (tools and equipment). And precious metals to use as currency.
How do you know how inflation affects your purchasing power? You need to see how much your income or capital increases each year. Compared to the number of things you need each year. The government comes up with an average number called the Consumer Price Index (CPI). That it supposes to achieve by the average person. To see your personal impact, you need to account for what your income and expenses. Might be as they change with time, priorities, and ability to generate income.
