Understanding Inflation

We have all had our grandparents tell us at some point “things used to be so much more affordable back in my day”. Is this necessarily true? When you understand inflation and what it does to the value of the dollar then you will understand why time plays a key role in how far your money goes.

Why does it happen?

Sometimes products actually become more expensive because they are considered higher quality but if it is the same products or services we are talking about and they are increasing there is a reason for this. Many people think that inflation is completely based on more money being printed. When most people are talking about inflation though, they are often talking about price inflation though.

When employment goes up wages also start to go up. These are directly related to demand as it also goes up alongside the income of the increased amount of laborers. As there are more people investing into the economy then there will be an increase prices. This is what caused price inflation over time.

With these ideas in mind one may think that this is obviously a normal cycle and that as long as we are making more and spending more than prices will increase. The truth is that this is not always true. Some prices of items go up regardless of increase in wages and sometimes there are those who have fixed incomes that have to still pay more for products. The choice is either to increase supply or prices. Even in good economies there will be a moderate amount of inflation over time.

While it may seem like customers get the short end of the stick there are benefits.

Customers are able to pay off their debts just as the government is because more money is coming in and the debts aren’t increasing with the increased amount coming in. This means that you aren’t paying as much back as you pulled out unless the interest is more than inflation.

Beware of False Security

Ultimately it takes fewer hours of work to pay off your loans or debts than it did a year ago. While this may seem like a great deal to people who have debts it also can lull them into a state of false security. They may think that the longer they wait the less they really have to pay back which is not true at all. It really takes consistency and planning to get rid of debt over time.

Rather than looking at inflation as something that affects value, it is more about affecting the buying power of consumers. Whether it increases your income through income inflation or affects your ability to buy services and products because of price inflation. What you are really experiencing is potency or lack of potency with your finances.

Stay Educated and Make Smart Purchasing Decisions

When you understand this as a consumer you will be able to make better financial decisions. Leaving your money in the bank may actually decrease your buying power over time. This is also a reason why people often decide to pay off their loans slower. Ultimately understanding the economy is a good way to understand what is going on with your finances.

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