If you've been following the Russia-Ukraine conflict or have perhaps heard of the oil and gas shortages and subsequent price increases that have resulted from this crisis, you've probably heard the word "inflation" thrown around. But what does this term mean exactly? Simply put, inflation is the rate at which the prices of goods and services in a country increase. With supply shortages leading to price increases across the globe, chances are that inflation has affected your life whether or not you are aware of its existence. Let's discuss why inflation is important and delve into the ways that it affects your life.
What is inflation and why is it important?
Inflation is the overall increase of prices over time, which can be caused by a surge in the demand for certain products or supply shortages from manufacturers. Governments around the world track their countries' inflation rates by using the consumer price index — a measurement tool that tracks the average change in prices of goods and services across a range of categories such as food, energy, medical services, and vehicles. When inflation goes up, your purchasing power gets reduced as the same products and services that you usually purchase now cost more. Here are some of the largest effects that inflation can have on your life.
A higher cost of living
The average price increase of goods across the board will mean that your expenses are bound to increase. Still, the extent of this increase largely depends on where you typically spend your money. For example, overall year-on-year inflation in February 2022 was 7.9%, however, gasoline prices surged by 38% during this same period. Energy prices also increased drastically, by 25.6%. This means that those who relied more heavily on such supplies may have experienced a larger increase in expenses.
Rising costs aside, some benefits may arise as a result of inflation. Because prices tend to rise when consumers are buying more, companies may be encouraged to raise their production levels in order to capitalize on this increased demand. This could lead to a need for more staff members and thus, higher levels of employment. If the number of jobs in an industry rises significantly, employers may also have to raise salaries in order to remain competitive during the search for fresh talent.
Rising interest rates
To keep inflation under control, the Federal Reserve may decide to adjust its federal fund rate, which is the rate at which banks pay to lend money to one another. This adjustment could influence short-term interest rates, with lenders increasing the interest rates of certain loans. This may make you think twice before taking out a new loan. For existing debtors, however, inflation is actually good news. If the dollar is losing value and thus loses its purchasing power, then any of your existing debts will lose value themselves. While you may still owe the same amount of money as you did before, the fact that it won't go as far as it did before when it comes to purchases certainly is a silver lining.