What is Inflation?

Howdy Wall St. Willy! I heard that some country had a really high inflation rate. But what is inflation anyway?

Inflation is the increase in the prices of goods and services over time.

Well, how does that affect us?

Because of inflation the value of the dollar, also called its purchasing power, reduces every year. So, $100 five years from now cannot buy the same amount of stuff it can buy today.

This means that the return that you get from any investment is at least more than the inflation rate otherwise your money would actually lose its value over time.

So, inflation is bad, right?

A high or very high inflation rate called hyperinflation isn’t good because that usually means the government is spending a lot more money than it is earning.

But a lower or moderate inflation is good because it means there is a reasonable demand for the goods and services in the economy.

Well, can the prices of goods and services go down over time instead of going up?

Yes, at time the inflation can be negative and prices can go down. That’s called deflation.

If it continues for a long period of time, it is a sign of a weak economy because it indicates a lack of demand for the goods and services, which means that less than expected or less than needed people want to buy the products and services that that country provides.

Who decides the rate of inflation?

The inflation rate is decided by the markets depending on the economic factors but usually a country’s central bank or a monetary authority like the Federal Reserve in the US decides policies to change the rate of inflation over time.

What’s the current rate of inflation?

The rate of inflation at the end of 2018 is around 2.5% in the US.

Thank you very much for telling me about inflation, Wall St. Willy.

You are welcome, Sooper Cooper. Remember, Finance is Your Friend!

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