Although the price changes of individual products over time can be easily measured, human needs encompass beyond just one or two products. To live a comfortable life, individuals require a large, and variety set of products along with a list of services. Supplies like fuel, metal, food grains; utilities such as transportation, and electricity, and services like entertainment, health care, and labour.
Inflation sets sight in measuring the general impact of price changes for a variety set of products, and services- allowing the rise in the price value of goods, and services in an economy over a period of time to be presented in a single value.
What is Inflation?
Inflation is the term we use to describe when there is a rise in prices- with the drop of purchasing power over time. On the other hand, deflation occurs when prices decline, and purchasing power rises.
So when do we notice if there is an inflation?
Increase of price in general
A broad increase in the prices of goods, and services including:
- Everyday items such as petrol, food, and household items
- Services such as rented housing, and insurance
- Durable goods such clothings, and electrical appliances
It means you can buy less for RM100 today than you could prior to inflation! The rate of inflation is calculated by comparing the goods, and services with what it was a year ago- the level of Consumer Prices Index (CPI). Inflation lowers the value of the currency over time.
Causes of Inflation
- Demand-Pull Effect
This type of inflation transpires when there is an increase in the supply of money, and credit that uplifts the overall demand for goods, and services to rise rapidly than the economy’s production capacity: increasing the demand, which leads to price escalations. For instance, when demand for new cars recovered more quickly than expected from its sharp drop at the beginning of the COVID-19 pandemic, principal shortage in the stock of semi-conductors made it hard for the automotive industry to keep up with this revitalised demand. Subsequentyly, shortage of new vehicles led to a spike in prices for new and used cars.
- Cost-push Inflation
This type of inflation takes place when the prices of final goods, and services ascents as the results of the rising price of input goods, and services. A good example of this can be observed when the prices of commodities spiked abruptly during the pandemic, and the aftermaths. This is due to drastic changes in demand, serving cost, buying patterns, and perceived value across areas, and value chains.
How inflation affects us?
There are a few circumstances the inflation can affect us.
- Lifestyle
Inflation affects your lifestyle as you end up spending a lot more than the usual budgeted amount on something. Your cost of living is affected directly by inflation due to price rises of goods, and services.
- Savings Plans and Investments
As inflation rises, you need to save more for your saving plans, be it long term or short term plans such as education plans due to everything becomes more expensive. You might need to adjust your investment plans in order to save more.
- Future Retirement
When there is a rise in inflation, this will lead to a great impact on purchasing power, and one must learn how to budget differently if you are on a fixed income. It also means saving more for retirement than one think is needed in order to account for the weakening in the value of currency, and to keep certain lifestyles or needs.
On a Final Note
A low, and stable rate of inflation is helpful in creating a healthy economy. However, high, and unstable rates can be detrimental to economy, and people. It is challenging for people to plan how much they are allowed to spend, save or invest if the prices are too volatile, and unpredictable. Watch this space. ‘Inflation Part 2 (Final) – How Governments help to alleviate the burden of inflation, and what you can do to hedge inflation ‘ is coming next.
