馃挵 What is inflation and how does it affect your wallet? A complete guide to understand it
Inflation is one of those economic concepts we hear about every day on the news 馃摵, on social media 馃挰, or when we notice that the supermarket cart costs more than a few months ago 馃洅.
But… what does it really mean? Why does it happen? And how does it affect us in our daily lives?
In this article, I’ll explain it step by step, clearly and with real examples. 馃憞
馃搱 What is inflation?
Inflation is the general and sustained increase in the prices of goods and services in an economy over a period of time.
➡️ In other words: when everything gets more expensive, money is worth less because you can buy fewer things with the same amount.
Simple example:
If a coffee cost €1 a year ago, and today it costs €1.10, the price has gone up 10%.
That increase is part of the inflation phenomenon ☕馃挾.
馃Ь Main causes of inflation
There are many reasons why prices rise, but they are usually grouped into three main types 馃憞
⚙️ 1. Demand-pull inflation
It occurs when demand grows faster than supply.
➡️ If many people want to buy something but there are few products, prices go up.
Example: At Christmas 馃巹 the demand for toys increases, so prices tend to rise.
馃捀 2. Cost-Push Inflation
It occurs when production costs rise (raw materials, energy, wages...).
Companies pass that increase on to the final consumer.
Example: if oil prices rise 馃洟️, transportation costs also rise, which in turn increases supermarket product prices.
馃彟 3. Monetary Inflation
Occurs when there is too much money circulating in the economy 馃挵馃挵.
If there is more money but the amount of goods does not increase, prices go up.
Example: when central banks print money to stimulate the economy, inflation can rise if not properly controlled.
馃搳 How is Inflation Measured?
Inflation is measured with the Consumer Price Index (CPI) 馃М.
This index calculates how much the average price of a basket of goods and services (food, transport, housing, leisure, etc.) consumed by an average household changes.
Example:
If the CPI rises by 3% per year, it means that on average prices have increased by 3% compared to the previous year.
馃 Effects of Inflation
Inflation affects everyone, but in different ways. Let's see the main consequences 馃憞
馃憥 Negative Effects
- 馃敾 Loss of purchasing power: money is worth less, so you can buy less with the same salary.
- 馃搲 Economic uncertainty: companies and investors hesitate when planning long-term.
- 馃彟 Savings lose value: if you keep money “under the mattress,” it is worth less each year.
- 馃挵 Dangerous debt: if prices rise faster than salaries, families may get into debt more easily.
馃憤 Positive Effects (in small doses)
- 馃殌 Stimulates consumption: if people think prices will continue rising, they tend to buy sooner.
- 馃捈 Reduces debt burden: with moderate inflation, old debts lose real value.
馃挕 For this reason, central banks usually consider a controlled 2% annual inflation as “healthy.”
馃彌️ Who Controls Inflation?
The main entity responsible for keeping inflation under control is the Central Bank 馃彟.
For example:
- In Europe: the European Central Bank (ECB) 馃嚜馃嚭
- In the U.S.: the Federal Reserve (FED) 馃嚭馃嚫
These institutions use tools such as:
- 馃挵 Raising or lowering interest rates
- 馃搲 Controlling the money supply
- 馃捁 Buying or selling government bonds
When inflation rises sharply, central banks increase interest rates, making loans more expensive and slowing down consumption.
馃Л How to Protect Yourself from Inflation
Although we cannot avoid inflation, we can protect our savings and income against it:
馃拵 1. Invest in Real Assets
Properties, gold, art, or commodities tend to retain their value during inflationary periods.
馃搱 2. Invest in the Stock Market
Companies that can raise prices without losing sales may benefit from inflation (e.g., energy or food sectors).
馃挼 3. Look for Investments with Returns Above CPI
Index funds, inflation-linked bonds, or interest-bearing accounts can help maintain purchasing power.
馃М 4. Reduce Variable-Rate Debt
If banks raise interest rates, variable-rate debts become more expensive. It's advisable to fix rates or pay off debt as soon as possible.
馃實 Inflation Around the World: Recent Examples
- 馃嚜馃嚫 Spain reached rates of 10% in 2022, driven by energy and the war in Ukraine ⚡.
- 馃嚭馃嚫 The U.S. experienced its highest inflation in 40 years, reaching 9.1%.
- 馃嚘馃嚪 Argentina suffers annual inflation rates above 100%, drastically devaluing its currency 馃捀.
This shows that inflation is not the same in every country, and depends on their economic, fiscal, and monetary policies.
馃敭 Conclusion: Inflation, a Silent Enemy
Inflation is like an “invisible tax” that slowly reduces the value of money 馃拃.
Although moderate inflation can be beneficial for economic growth, when it gets out of control it can have devastating effects on the economy and on our lives.
馃挰 In summary:
“With inflation, you don’t need to spend more… but everything costs more.”
That’s why understanding it, tracking it, and preparing for it is key to maintaining your financial stability. 馃Л馃捈
馃摎 Quick Glossary
0 Comments