When talking about financial life, expenses, income, investments and plans, one of the first things that come to mind is financial education. Understanding concepts, ideas, processes and mechanisms related to money is one of the main ways to have a healthy relationship with your finances, regardless of monthly income or social class, for example.
The first step to learn about financial management is to understand some basic ideas that surround this subject. There are several concepts in economics that directly impact the consumer’s daily life: costs, liquidity, financing, loans for bad credit, interest rates, investments, among others.
One of the broadest and most important is inflation, an index related to general prices in an economy. In this article, learn more about the concept — what does it mean, how it was created, its role and importance, how it is measured and, at last, how to deal with it in everyday life.
Definition
The concept of inflation is related to the increase in the price of products and services in any economy. This increase is general and progressive; therefore, in a more simple way, inflation means the decrease of purchasing power of money. There are basically three categories of inflation: demand inflation, costs inflation and inertial inflation.
The first one is about the increase of prices when people’s purchasing power comes up in relation to the economy’s capacity to provide products and services. The second one is when inputs for production are more expensive and this cost is passed on to consumers.
Finally, the third one is the result of the psychological impacts of inflationary movements.
Historical context
In the 19th century, the rise or fall in prices was made by the economists based on different factors, like changes in the production costs of products and services and changes in the price of the current money.
The term “inflation” itself appeared during the Civil War, referring to the depreciation present as the number of banknotes and metal available was not compatible. This correlation between both money symbols was first identified by David Ricardo and David Hume, classical economists.
Which is its role in the economy
Some economists, researchers and executives see soft inflation as a “lubrication” mechanism. This happens because, on a small scale, inflation makes it harder to renegotiate some prices to lower amounts, mainly salaries and contracts. Therefore, with this general increase of prices, it gets easier for the relative prices to adjust — this is the “lubrication”.
Also, many professionals and researchers of financial institutions see inflation as an incentive for new investments. This happens because, many times, the high level of inflation allows investors to get greater profit in comparison with more conservative ways of investments since it allows them to have a greater profit.
How to protect your money from it
The main concern about inflation is how to keep the financial life healthy even if the purchasing power is decreasing. The inflation and its consequent increase in prices make our money less valuable: with the same amount of money, as time goes by, you cannot buy the same stuff anymore.
It is not easy to reduce the impact of inflation. It may be necessary to adapt a few aspects of life, like changing consumption choices. In terms of investment, some of the recommendations include buying durable goods, such as houses, and investing in stocks — two types of investments that yield more gain.
