Have you wondered why prices of food, clothes and other commodities are steadily going up in a fast rate? Or why P100 worth more twenty years ago than today?
The answer for these questions is due to INFLATION. Basically, inflation is the enemy of money. It reduces the buying power of your money on hand.
It is the reason why almost anything increased their price as the time goes by. We cannot avoid inflation to happen even government cannot eliminate it. They may reduce it to a certain percentage but to totally get rid of inflation is impossible.
Effects of Inflation
Inflation has its positive and negative effects. Normally, when people say inflation, they think always of its negative effects.
For consumers like us, we don’t want inflation because it will lessen the things that we can buy. In addition, our money today will be worth lesser than tomorrow or a year later.
If there’s a high inflation, investors might not invest in that country because of the high cost of doing business and cost of living. High inflation may also create turmoil and social unrest because many people cannot afford to buy food and other basic necessities because of high price.
On the other side, inflation can have its positive effect on the economy as a whole. Inflation can be used by the central banks to adjust its nominal interest rates and look for ways to invest in non-monetary capital projects.
How Inflation is Measured?
Inflation is measured by what we called ‘inflation rate.’ Basically, it is the rate of change of Consumer Price Index (CPI) over a period of time, for example, in a year. CPI is a price index or the change in price level of consumer goods and services purchased by households.
Inflation rate is generally expressed in percentage. High inflation rate means higher prices of consumer goods and services than before.
Why it is Important to Know Inflation?
Inflation is very important when you are planning to invest your money. I will give you an example. Say, you have, P10,000 you want to put in time deposit in 2010. Time deposit will normally give you an interest, for example at 5% per year. However, the inflation rate in 2010 is 6% at that one year period when you invest your money in TD.
Question: Do you profit from investing in TD at that year? The quick answer will be NO. Why? Because the money you put in TD actually lose 1% because of inflation. The real value of your P10,000 now is only P9,900.
Inflation can have its positive and negative effects in the society. However, it can also help you in your investing planning and decisions. Make sure that your investments will give interest higher than the inflation rate.