Inflation is a measure of supply and demand. The greater the demand and the lower the supply the higher the price of a product is likely to be. High demand will keep pushing the price up, making an object worth more today than it was yesterday. That’s inflation, rapidly increasing prices.
The problem is that no one likes inflation, it increases the cost of living making it more difficult for everyone to live comfortably.
Even worse, if you have a personal bank account or savings account that earns interest you’ll need to check it. Should the rate of interest be lower than the rate of inflation, your account is actually decreasing in value, in real terms. That means you won’t be earning money on your account, you’ll be losing it.
How This Works
Inflation changes the price of a product. If you can buy something today for £100 but tomorrow it has risen to $110 you can say the price has risen by $10, that’s 10%.
In other words, if you wait until tomorrow to purchase the item it could cost you more than today.
Couple this with a savings account that pays 5%. That means your £100 will have transformed into £105. It may seem nice but you won’t be able to afford the item that was £100 yesterday and is £110 today.
In short, inflation has outpaced interest rates leaving you worse off.
That said, when inflation does climb rapidly it is common for the central bank to raise interest rates. This is to make borrowing more expensive and less appealing, reducing demand and lowering the price of products. In effect, reducing the inflation rate.
Current Influencing Factors
There are many factors that influence the rate of inflation:
- Rapidly Growing Economy
The global pandemic took its toll on economies across the globe. In order to prevent economies from stagnating and to help people survive the health crisis, governments injected large amounts of money into the economy, helping to maintain spending and minimize inflation.
This pushed demand upward and consequently saw a squeeze on supply, resulting in large price increases.
The Russian declaration of war on Ukraine invoked sanctions from countries across the globe. These sanctions immediately limited supply, as did the war itself. Again, this means less supply and the same, if not higher levels of demand.
That means prices go up rapidly, creating inflation.
Alongside this, downward adjustments in currency exchange rate, such as that triggered by the war, make a country’s products appear cheaper, encouraging people to spend. This will compound the supply and demand issues that make inflation possible.
- Increased Level Of Money
When the total amount of money in circulation rises at a faster rate than current production levels the demand for products will also climb. This is because more people have the available funds to purchase these items. Naturally, this increases the price, causing inflation as there simply aren’t enough products for everyone
Unfortunately, the global pandemic has resulted in massive government stimulus, effectively pumping money into the economy at an unprecedented rate. Inflation was an inevitable side-effect of this stimulus.
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