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Last Updated on February 28, 2023 by Kel Ashley

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Inflation played a major role for consumers and investors in the same way. It can be overused cars, the housing market, the stock market, and beyond. This is because as prices rise over time the buying power of your dollar slowly decays. But the rise and fall of inflation can occur for different reasons depending on the state of the economy. Inflation is hovering at a 40-year high, driven by steep increases in food prices, housing and utilities. The Federal Reserve is trying to bring it down by aggressively raising interest rates, even if it pushes the economy closer to a recession. I know each of us has faced this difficult situation. I’m sure this free resource will help you take the necessary precautions.

What is Inflation?

A rise in prices, on the other hand, decline in purchasing power over time commonly known as inflation. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. Inflation can be contrasted with deflation, which occurs when prices decline and purchasing power increases.

We can measure inflation easily by having an eye on the price changes of products over time. To live a comfortable life people need a whole set of products and services. This includes food, clothing, entertainment, transportation, utility, healthcare, education and many more. Inflation affects each and everything listed above and increases the price level of everything. Prices rising with everything means one unit of money buys fewer goods and services. The more the prices of goods and services increase, the less you might be able to buy to stay within your budget. This loss of purchasing power impacts people’s comfortable living. If this is happening to you, don’t worry our free resource will help you.

Causes of Inflation

You’re probably wondering what causes inflation. There are multiple factors.

1. Demand-Pull Inflation

The first factor we are talking about is demand-pull inflation. It means how increasing demand for goods and services impacts inflation. What happens in this is though the demand is increasing, the corresponding increase in supply is not enough. Businesses are unable to increase their production quickly enough to meet the demand and the price increases.

2. Cost-Push Inflation

Increasing the demand isn’t the only thing that drives up the prices but also an increase in production costs for businesses. This is what we called cost-push inflation. Increasing the cost of raw materials and labour could make businesses raise the prices of the goods and services they sell. As most businesses and services depend on each other leads to an overall increase in prices and higher inflation rates.

3. Devaluation

Devaluation happens when a currency loses its value when compared to other currencies. The result of this makes imports more expensive. It directly can lead to inflation. If the U.S. dollar devalues against the euro, it takes more dollars to purchase the same amount of euros. If a business imports goods from Europe, it may need to raise prices to cover the increased cost.

4. Rising Wages

Increasing your wages… sounds good. Though it sounds like a good thing, according to some economic experts there can be some consequences. Especially when it comes to raising the minimum wage for workers. When people earn more money, they may have more spending money on goods and services. Increased demand could cause businesses to raise their prices to cover higher production and labor costs.

5. Inflation Expectations

You may be wondering how worrying about inflation leads to higher inflation results. This is how it happens. When companies and workers panic about inflation, workers may ask for higher wages to offset the increased cost of living. But it’s a self-fulfilling prophecy: their fears can worsen the problem.

To afford higher wages for their workers, companies have to increase their prices. When companies think raw materials cost more, they will also hike their prices to maintain their profit margins. Combined, that means inflation expectations can cause inflation rates to rise.

Who is hurt by inflation?

At the end of the day, everyone’s a consumer contributing to the economy by spending money on things like food, clothes, education and transportation. When inflation rises quickly, it can affect consumers’ spending ability and the overall economy.

Retirees on a fixed income, business owners and prospective loan borrowers may be especially affected by inflation. Don’t worry. Our free resource will help you.

Conclusion

Although it’s important to keep an eye on inflation, it’s also important not to make investment decisions without looking at the bigger picture. If you’re not sure how inflation might affect your finances, it’s best to speak to a financial professional first. That way you can develop an optimized strategy with your money.

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