What Is Inflation?
Table of Contents
Introduction
The value of a dollar today is not the same as it will be in the future. This is because of inflation: how much faster prices are rising than the overall level of prices in an economy. Let’s look at what inflation means and how it affects you.
What is Inflation?
Inflation is a measure of how fast the overall level of prices for goods and services is rising and, consequently, the purchasing power of a dollar is falling. It also indicates that more dollars may be required to purchase a given item.
For example, if you paid $100 for a pair of shoes six months ago and now, they cost $110, then Inflation has increased by 10% over that period because $10 worth of your money today buys less than it did previously, and you would have needed to spend more to buy what used to be priced at $100. In other words, inflation results when too many dollars chase after too few goods or services; prices go up as sellers try to recoup their costs while keeping profits constant by raising their asking price.
How is Inflation measured?
The most well-known measure of inflation is the consumer price index (CPI), published by the Bureau of Labor Statistics. The CPI is designed to measure the average price change over time for a representative basket of goods and services purchased by individuals. The CPI measures price changes on goods and services used in day-to-day living, such as food, transportation, education, and medical care.
Financial markets use the Consumer Price Index to determine if current inflation rates will continue or if it’s likely to increase/decrease in coming months. If Inflation increases rapidly and unexpectedly, then this can negatively affect financial markets because it signals an increase in money supply which causes consumers’ purchasing power to decrease as their wages remain constant or fall slightly behind due to high levels of unemployment during recessions or depressions when people are out looking for work rather than spending their money on goods and services provided through employers who may be forced into bankruptcy due to falling revenues during times like these; thus forcing someone else out there too – leaving them unemployed too.
What are the effects of Inflation on families?
Inflation affects families, including the cost of everyday goods and family income.
- The cost of everyday goods such as groceries, clothing, and household items increases with Inflation.
- Family income does not keep up with the rising prices of these goods.
Conclusion
You could get by on the same dollar in 10 years if prices were constant. But as we’ve seen, that’s not how it works. If prices rise at a 3% per year for the next ten years, then your dollar will only be able to buy about two-thirds of what it can buy today. That’s why it’s crucial to keep Inflation in mind when thinking about the future value of your money—even if the change seems small for now, over time, those small changes add up and can make a big difference in what kind of lifestyle you’ll be able to afford later on.
