We’ve all heard the word inflation thrown around over the years. We know it’s not a good thing, we know it’s always happening, but do we really know what it means?
Inflation is the increase in the price of goods or services due to the weakening currency caused by changes in the economy. These changes are things like surges in product demand, production cost increases, supply chain breakdowns, or changes in the housing market. These economic changes require changes in the pricing of goods, and there have been two major theories that explain this process.
The cost-push theory suggests that higher costs raise prices. There is also the demand-pull theory that suggests that demand outpaces available products. Higher demand for goods leads to higher prices of goods and higher profits. Both of these theories work off the same inflation measurement, the Consumer Price Index. The CPI monitors a basket of goods like housing, food, medicine, and recreation to reflect pricing of different categories.
The Federal Reserve aims to keep inflation at 2% or less each year, but rates are starting to rise with a jump of 6.8% in 2021. Thinking back to our theories, supply chain breakdowns as well as the loss of production jobs due to the pandemic makes it so that this jump is not very surprising. Still, it is important to understand what inflation is and how it works in order to protect your finances.
There is no way to stop inflation, but taking steps to increase earning potential can lessen its effects. Consider continuing education to increase average earning potential, or invest in real estate to get a guaranteed 10% ROI. Inflation is inevitable, steps that are made today can protect your finances in the future. Learn more about the causes and effects of inflation in the infographic below: