After a heavy meal at a local nasi kandar restaurant, I bought 10 sen of Hacks (yes, the candy). I still remember that I could get 3 candies for 10 sen. Later on, it is 5 candies for 20 sen. It has been a long time I didn’t spend money on candy. So I asked the cashier in case it is more expensive already. And it is lucky that I asked, because it is selling 2 for 10 sen nowadays. The price rise 50% after 20 years. That’s inflation! However, Hacks candies are still very affordable. Think about your fuel tank now!

Inflation is the rise in the general level of prices of goods and services in a given economy over a period of time. It may also refer to the rise in the prices of some more specific set of goods or services. In either case, it is measured as the percentage rate of change of a price index.

In layman terms, several explanation of inflations is how fast prices rise, or how fast your money becomes less valuable.

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## What cause inflation

There are two camps that disagreed strongly on the main causes of inflation

• Monetarists – argued that money supply dominated all other factors in determining inflation
• Keynesians – argued that it is real demand that causes inflation

But economy is such a huge subject that there is no one sure thing that causes the other.

## How to calculate inflation

A variety of inflation measures are in use, because there are many different price indices.

Two widely known indices for which inflation rates are commonly reported are the

• Consumer Price Index (CPI) –  measures nominal consumer prices,
• GDP deflator –  measures the nominal prices of goods and services produced by a given country or region.

Inflation is causing your money to become less valuable, if you do nothing about it.

According to this inflation calculator, based on US CPI

What cost \$1000 in 1997 would cost \$1309.22 in 2007. Also, if you were to buy exactly the same products in 2007 and 1997, they would cost you \$1000 and \$785.20 respectively.

## How to outstrip inflation

For sure, if you do nothing to prepare for inflation effect, your buying power may drop in the future.

Human being is a very flexible creature. When the certain products get more expensive, and it finally hurts our wallet, we will be flexible enough to use less of it. You can either

• buy less of the more expensive stuff, and more of the less expensive stuff. OR
• let your standard of living fall

Invest for better returns
You just have to get your money to work harder, and get a return that’s higher than inflation rate.

In the area of wealth accumulation, inflation is an enemy that approaching you step by step quietly. By the time you notice that and feel the pain of its attack, it is probably too late. The last resort is to see your standard of living fall underneath.

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KCLau

Personal finance author and trainer

### 18 replies to "Knowing your enemy – Inflation!"

• […] presents Knowing your enemy – Inflation! posted at KCLau’s Money Tips, saying, “Article on what inflation is, what causes […]

• Richard McLaughlin

Interesting post. It seems that (since I live in France) there are a lot of things that are suddenly in my price range. Some people are happy the dollar lost value.

I stumbled it and included it in my blog carnival.

(see the carnival at: http://cheapkeywords.info/one-huge-carnival-of-…)

• […] presents Knowing your enemy – Inflation! posted at KCLau’s Money Tips, saying, “Article on what inflation is, what causes […]

• […] presents Knowing your enemy – Inflation! posted at KCLau’s Money Tips, saying, “Article on what inflation is, what causes […]

• […] presents Knowing your enemy – Inflation! posted at KCLau’s Money Tips. Article on what inflation is, what causes inflation and how we […]

• […] undeniable that the living expenses in Malaysia are getting higher at a much faster rate, although inflation reports that the rate is low. Feeling the pressure of petrol subsidy cut, and rising cost of almost […]

• Making REAL Money Blog

16th Carnival of Making REAL Money: March 10th 2008

Welcome to the March 10, 2008 edition of carnival of making real money. Some how out of 66 submissions, I was able to find only 16 that I thought were appropriate for this carnival. So without further ado, I present these in the carnival… Thanks …

• […] presents Knowing your enemy – Inflation! posted at KCLau’s Money Tips, saying, “Article on what inflation is, what causes […]

• […] presents Knowing your enemy – Inflation! posted at KCLau’s Money Tips, saying, “Article on what inflation is, what causes […]

• […] presents Knowing your enemy – Inflation! posted at KCLau’s Money Tips, saying, “Article on what inflation is, what causes […]

• […] We all hate inflation, but it’s good to “know thy enemy” says […]

• […] presents Knowing your enemy – Inflation! posted at KCLau’s Money Tips, saying, “Article on what inflation is, what causes […]

• sg

I would like to comment on ‘money supply’. I can’t differentiate between (a ‘third’ view?) Austrian economics (www.mises.org) and ‘monetarist’, but printing money absolutely dilutes the value of goods. Prices could never increase so much if it were not for central banks printing money.

There used to be a gold standard that prevented banks from printing money and prices did not change (in fact, dropped) for ONE HUNDRED YEARS in 19th century USA…creating huge wealth (savers actually maintained their purchasing power).

Listening to Peter Schiff (www.europac.net), I can’t see why banks really need to print so much money. I think the rule now is to print as much money as the economic growth rate so you have ‘price stability’. But if no (or very less) money is printed, then prices of everything drops…and apparently this is ‘deflation’ and is labeled bad for economy.

However, how could dropping prices in a broad range of consumer goods be a bad thing? Increased productivity has brought the prices of computers way down…savers keep their power…a huge plus for us all.

Yes, typical supply and demand causes prices to rise. However, recently due to banks trying to sustain the US, money has been printing ~20% rate worldwide (US doesn’t even publish M3 anymore!)….isn’t it any wonder inflation is getting exponentially worse?

• gebrihell

sg good point. i feel the same way too. is there a conspiracy to devalue the paper money??? what is the reason behind this action???

• […] tells you what you need to know about inflation at KCLau’s Money […]

• HM

kclau,

can you provide me simple examples where to invest that money?

i am looking for long-term goals, medium-risk and average or higher return.

thanks

• HM

hi kclau,

what would you do if you have apt. mortage (45K) and cash 45K?

would you pay the debt in lump sum and expect passive income from renting

or

invest that cash into other investment vehicle, such as UT

thanks

• KCLau

I would use the cash to invest in area that I’m confident to reap return more than the mortgage interest charges.