Understanding Inflation in Simple Terms (2022)

Inflation 2022

Introduction

It wouldn’t be inaccurate to state that this year has witnessed a significant increase in the number of conversations on inflation. As the price of oil and other commodities has increased and the FED has raised interest rates to combat it, and it has become a hot topic. It is undeniable that each of us is impacted by it, so it is critical that we comprehend its fundamentals. Therefore, we will discuss what inflation is and some key components of it in this blog.

What is Inflation?

The best way to describe inflation would be through an example. According to usinflationcalculator.com the average price per gallon of milk in 1995 was $2.48, and the average price per gallon of milk in 2021 was $3.55. It has even gone up in 2022. So a major reason for the average price of milk going from $2.48 to $3.55 is inflation. In more simple terms, if you had $100 10 years back, you could have bought more things with it than you can today if you have those $100. 

 

The worth of a dollar (in the case of the United States) decreases when more banknotes are created. In essence, this is inflation. Returning to the idea of supply and demand, this is relevant. The value of any given something decreases when the supply of that thing increases. With money, the same thing occurs. A person must pay more money to purchase the same thing they could have earlier with a cheaper amount because as more bills circulate, their value decreases, driving up prices.

Why should you care about it?

As was already mentioned, inflation lowers the value of the dollar. As a result, you should be concerned about inflation since it reduces the purchasing power of your money. The 100 dollars you have today would lose value over time, and you would not be able to purchase the same number of items with them in the future.

 

Is Inflation necessarily bad?

If you have debt with an interest rate that is lower than the rate of inflation, it could not be a terrible thing for you. You would have more cash on the surface thanks to it, and you would pay less in actual value. Another reason why it is not bad is because it implies a developing economy, and a country’s financial future is better when the economy is growing.

 

Countries currently with the highest inflation

Data by worldpopulationreview.com shows that as of January 2022, Venezuela is the country with the highest inflation of 1198.0%, followed by Sudan, Lebanon, Syria, and Suriname.

 

How to tackle it as an individual?

In other words, if you raise the worth of your money at a pace higher than the rate of inflation, you can combat it. For instance, if you invest $100 and earn a 10% return when inflation is just 6%, you not only beat it but also increase your financial situation. Therefore, investing your extra cash in some way is the best approach for an individual to combat inflation.

 

Conclusion

So, to sum up, inflation is simply when there is a greater circulation of money due to the printing of more bills, the currency loses value, and a person must pay more than they did previously for the same commodity. Making investments is a smart practice that will shield you from the effects of it.

 

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