How does inflation work? Inflation is when prices of goods and services increase. This affects your purchasing power, depending on your personal situation. Some inflation can be a good sign, but only if your wages rise along with prices.
Purchasing Power
Purchasing power is determined by the amount of goods and services you can purchase by your dollar at any point and time. If prices of goods and services go up, but your wages do not go up, inflation will hurt your purchasing power. If your wages go up at the same rate as inflation increases, you will still have the same purchasing power, and you will not feel the effects of inflation as much as another person whose wages did not rise accordingly.
Healthy Inflation
People usually talk about inflation like it is a bad thing, but inflation actually indicates the fact that the economy is growing. False inflation-when money is pumped into the economy without goods or services backing the increase in money-is the kind of inflation that hurts you the most because it makes the value of the dollars in your bank account fall. However, natural and healthy inflation occurs because of a higher demand by consumers for products, allowing vendors to charge more money for what they sell. Healthy inflation is usually accompanied by the natural rise of wages and a responsive adjustment of interest rates, benefitting society as a whole.
Unhealthy Inflation
Unhealthy inflation happens when inflation is unexpected or unanticipated. Inflation goes awry when consumers stop spending because prices have risen so quickly or other economic factors have frightened consumers, making them save their money as prices continue to rise. Sometimes local inflation will hurt you in relation to the global market since an increase in prices locally but lower prices globally can result in little business or trade for the local market, forcing a readjustment of prices in order to remain competitive.
The people who get hurt by all inflation-healthy or unhealthy, anticipated or unanticipated-are people who live on a fixed income. Retirees in particular will not see an increase in benefits or pension or Social Security no matter how high inflation rises or high how wages soar. These people experience significant decreases of purchasing power as inflation rises.
 | What causes inflation? Good question. Economists love to debate this topic round and round, and they have several theories about what causes inflation. |
 | How is inflation measured? It's a good question, considering prices for all goods and services do not increase at the same rate and the same time. |
Did you know there are several types of inflation? Each type of inflation affects the economy differently. In order to understand the effects of inflation, you need to understand what inflation is and how it works. |
If you're looking for a hedge against inflation, you will want to search for investments that either have high enough returns that they outweigh the effects of inflation or are geared to compensate for inflation. |
Knowing how taxes affect inflation can help you make informed decisions when it is time to vote on tax hikes or for the politicians who represent you. |
