INFLATION is the function of the supply and demand of money. Inflation is an economic term describing the sustained increase in prices of goods and services within a period. To some, inflation signifies a struggling economy, whereas others see it as a sign of a prospering economy. Here, we examine some of the residual effects of inflation. EXPLANATION Inflation is all about having to pay more for the same goods and services that you used to afford at a lower cost. Most of the time, the rise in income is not able to keep up with inflation, which puts a heavier challenge on making ends meet. 1. Erodes Purchasing Power An increase in the inflation rate would mean you’ll have to spend more on the same goods that you used to purchase at a lower cost. ● Inflation is a decrease in the purchasing power of currency due to a rise in prices across the economy. Inflation erodes purchasing power or how much of something can be purchased with currency. ● Because inflation erodes the value of cash, it encourages consumers to spend and stock up on items that are slower to lose value. It lowers the cost of borrowing and reduces unemployment. Example:This happens when countries add more money into the economy with little value which leads to higher prices and lower purchasing power from a grocery store example . Example: Is the rise in the price of our consumers good and services, items that you and I buy and is the result of way too much demand for these goods and services and not enough supply, so by increasing interest rates the idea is that it takes demand out of the economy. Increasing rates obviously increases the cost of borrowing and it discourages consumers and businesses to stop spending as much money as they otherwise would. Of you have debt a greater proportion of your income is likely to go towards paying off your debt so youre going to have less money to spend on goods and services reducing that demand , so the idea is that increasing interest rates takes money out of the economy,slows down economic activity and takes away some of the demand that is otherwise pushing up the prices of all these goods and services 2. Encourages Spending, Investing A predictable response to declining purchasing power is to buy now, rather than later. ● Cash will only lose value, so it is better to get your shopping out of the way and stock up on things that probably won't lose value. As the prices of commodities increase, an average earner may need to switch to a simpler lifestyle. A high inflation rate means you’ll have lower disposable income and will result in having less money to spend than you wish to. Buy rental properties , not only it will be worth more , but real estate income is one of the best way to hedge against inflation and since inflation causes the rent to go up more cash goes into your pocket Is inflation good or bad for the economy? Inflation is viewed as a positive when it helps boost consumer demand and consumption, driving economic growth. Some believe inflation is meant to keep deflation in check, while others think inflation is a drag on the economy. 3. Causes More Inflation Unfortunately, the urge to spend and invest in the face of inflation tends to boost inflation in turn, creating a potentially catastrophic feedback loop. ● As people and businesses spend more quickly in an effort to reduce the time they hold their depreciating currency, the economy finds itself awash in cash no one particularly wants. In other words, the supply of money outstrips the demand, and the price of money—the purchasing power of currency—falls at an ever-faster rate. 4. Insufficient fixed income The effects of the inflation rate will also affect those with fixed income such as retirees who rely on pension benefits. ● The usual pension they receive may no longer be sufficient to sustain their usual way of living, considering the increase in the cost of basic goods, medications, and utilities. 5. Lower capacity to save As financial resources tend to be lacking with a high inflation rate, you may find yourself without enough funds to allot for your savings, your child’s education, health emergencies, business, and retirement which may eventually affect your future plans. 6. Raises the Cost of Borrowing If interest rates are low, companies and individuals can borrow cheaply to start a business, earn a degree, hire new workers, or buy a shiny new boat. ● In other words, low rates encourage spending and investing, which generally stokes inflation in turn. Better to put some money in the bank, where it can earn interest. When there is not so much cash sloshing around, money becomes more scarce. That scarcity increases its value, although as a rule, central banks don't want money literally to become more valuable: they fear outright deflation nearly as much as they do hyperinflation. Rather, they tug on interest rates in either direction in order to maintain inflation close to a target rate (generally 2% in developed economies and 3% to 4% in emerging ones). 7. Reduces Unemployment There is some evidence that inflation can push down unemployment. Wages tend to be sticky, meaning that they change slowly in response to economic shifts. ● As unemployment falls, the theory goes, employers are forced to pay more for workers with the skills they need. As wages rise, so does consumers' spending power, leading the economy to heat up and spur inflation; this model is known as cost-push inflation. 8. Increases Growth Unless there is an attentive central bank on hand to push up interest rates, inflation discourages saving, since the purchasing power of deposits erodes over time. ● That prospect gives consumers and businesses an incentive to spend or invest. At least in the short term, the boost in spending and investment leads to economic growth. By the same token, inflation's negative correlation with unemployment implies a tendency to put more people to work, spurring growth. 9. Weakens or Strengthens Currency High inflation is usually associated with a slumping exchange rate, though this is generally a case of the weaker currency leading to inflation, not the other way around. ● Economies that import significant amounts of goods and services—which, for now, is just about every economy—must pay more for these imports in local-currency terms when their currencies fall against those of their trading partners. https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation. https://www.sunlife.com.ph/en/life-goals/live-life-bright er/how-to-survive-amidst-the-rising-inflation-rate-in-th e-philippines/ https://pidswebs.pids.gov.ph/CDN/PUBLICATIONS/pi dsdps9611.pdf https://europe.pimco.com/en-eu/resources/education/ understanding-inflation
