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.
Photo by articnomad
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.
Living below your means
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.
Recommended blog posts by other personal finance bloggers:
- Factoring Inflation Into Your Financial Plans
- More than just inflation | Wise Bread
- How to live with inflation | Wise Bread
- Wholesale Inflation vs. Consumer Inflation on Blueprint for Financial Prosperity
- The year of inflation « Dr Hsu’s Forum
18 replies to "Knowing your enemy – Inflation!"