The Silent Thief of Purchasing Power

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When prices rise, we can buy less with the same amount of money. This effect is known as a decline in purchasing power.

🧐 What is Inflation?

Inflation is measured by indices, the most commonly used being the Consumer Price Index (CPI). It tracks the change in the price of a "consumer basket" of goods and services that a typical household buys. Often governments will pick certain goods and say that the increase is real inflation. I assure you, this is not the correct diagnosis.

• Main Effect: The money you have today will be worth less tomorrow.

📉 Why is Inflation the "Enemy"?

1. Reduces Savings: If you keep your money in a bank with an interest rate of 1% and inflation is 5%, you are actually losing 4% of the purchasing power of your savings per year. Your money is nominally more, but in reality it can buy less.

2. Fixed Incomes: The impact on individuals with fixed incomes, such as pensions and annuities, is significant because their incomes do not keep pace with inflation.

3. Uncertainty and Instability: High and unpredictable inflation makes planning and investing difficult for both households and businesses.

💡 Examples of Inflation in Action   

Example 1: The Effect on Savings

Situation: You have 10,000 in a savings account with 0.5% annual interest.

Inflation: The annual inflation rate is 6%.

Result: After one year, your money is 10,050  (nominal increase), but to maintain the real purchasing power of the original 10,000, you will need 10,600  (10,000  + 6% inflation). Your real loss is 550  in purchasing power. Your money is nominally more, but in reality it is less.

Example 2: The Price of Coffee ☕

2020: A coffee costs 2.00.

Inflation: The overall inflation rate over the next 3 years is 30% (for example).

2023: The same coffee now costs 2.60.

Result: If your salary has not increased by 30%, you have to work longer to buy the same coffee. With 2.00 as of 2020, you can no longer buy the coffee in 2023. This situation is direct evidence of the reduced purchasing power of your currency.

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🛡️ Inflation Protection

Inflation can be an enemy, but there are ways to minimize its impact:

Investing: Instead of holding cash, invest in assets that have historically outperformed inflation (e.g., stocks, real estate, gold, or other commodities).

Savings Instruments: Using deposits or bonds with interest rates that are higher than inflation (this is difficult during times of high inflation).

Learning and Development: Increasing your skills and income so that your salary can outpace the rate of inflation.

Inflation is a natural part of the economic cycle, but when it is high and uncontrollable, it becomes a serious problem. Although money is not destroyed, it loses value, which reduces the usefulness of savings as a tool for future purchases.

To beat inflation, you need to turn your money from a "liability" (which loses value) into an "asset" (which grows or retains value). Inflation is only an enemy of your money if you keep it uninvested. In reality, everyone has their responsibilities and the freedom to make their own decisions.

 

  Author: Sezgin Ismailov