Inflation For Dummies: What Is Inflation? How Inflation Affects Our Money

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Welcome to Noble Gold Investments’ Inflation Series. In this series we will explain what inflation is, how it happens, different ways of measuring it and more importantly, how it affects us, investors, our life, and our retirement.

Let us start by defining inflation.

Inflation is the decline of purchasing power of a currency over time. It is usually reflected in the increase of cost of goods between a period of time.

They compute it by comparing the price of a basket of goods over some period of time.

As an example:

A gallon of milk
A pound of beef
A pound of banana
A gallon of dishwashing soap

Let us assume that December 30, last year, this basket of goods was worth $100. This is just an example, obviously those goods won’t amount to $100 yet.

By January 30, assuming you take the same brand and quality, it goes up $107. That means the inflation rate is 7 percent.

Now, this example is oversimplifying it.

Measuring inflation serves to gauge how much we need to earn in order to survive. And we have a longer list of needs in order to live with dignity. The list includes commodities like food grains, metal, fuel, utilities like electricity and transportation, and services like healthcare, entertainment, and labor.

Personally, you can gauge inflation when you look at the history of goods and services.

Take rent for example.

On your screens right now, you will see the historical median cost of a 1-br apartment in the US.

Back in 1980, it cost you $308. Fast forward to 2020, it’s at $1700.

To put this in a better perspective, salary increases averaged 13% between 1980 to 2020.

Your money is losing value faster than you're earning more of it. As a currency loses value, prices rise. That means the same amount of money buys fewer goods and services.

This loss of purchasing power impacts the general cost of living for the common public which ultimately leads to a deceleration in economic growth. The consensus view among economists is that sustained inflation occurs when a nation's money supply growth outpaces economic growth.

This is why our Central Bank shouldn’t just print money to pay debts or give to its citizens to buy goods and services. Well, they SHOULDN’T but they still do.

But there are other causes of inflation.

Watch the next part.

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