What is Inflation

by Gily Tenorio on April 8, 2011

in Financial Education 101, Inflation

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.

Final Word

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.

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{ 4 comments… read them below or add one }

Nanette C Samson January 14, 2012 at 05:53

tnx:)) I learned a lot and it helped me with my assignment.

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LarryB October 20, 2011 at 05:43

a good lesson to learn

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ruperto nambio July 17, 2011 at 11:46

yes it is true we cannot avoid inflation, but we can reduce it or tame it. when goods or commodity goes up the price there are relative factors that goes with it.
One, on imports using u.s. dollars, right now the currency exchange rate of peso to dollars has one advantage to exporters, more dollars to have and less pesos to use. But what had had happened, the more the peso is getting stronger, the price of goods continue spiraling up, why: importers do not change their price
even if they got lower exchange rate. In our government there is price control,l if there is, it has no political will to police those who are making the price of goods always going up. There is always connivance of greed between in power and those of importers. These two manipulate the price of goods and so what do we have, inflated price of commodities.
These groups have no feelings, what is important to them is to always on their status quo. Price Control where are you? Not existing! So, greed continue to manipulate on and on. I feel sorry for Juan dela Cruz

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gene April 15, 2011 at 15:57

wow these blog helps me a lot..this blog will equip me well before i enter the world of business..i’ll visit this blog every now and then…thanks a lot..

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