What is inflation?
Inflation is the steady increase in the price of goods and services over time.
It devalues units of currency (like the U.S. Dollar, PKR), resulting in a higher cost of living. Like when you were a kid a candy or a bubble cost you roughly 2 candies per rupee and now they cost 4 or 5 Rupees. Or, think about the cost to rent a room in Islamabad or Rawalpindi is 8000 Rupees and now the same room will cost you roughly 15-20k Rupees. This increase in price level is inflation.
Types of Inflation:
Hyperinflation occurs when prices rise by at least 50% each month. The best-known example of hyperinflation took place in Weimar Germany, in the early 1920s. Prices rose by tens of thousands of per cent each month, which very badly damaged the German economy.
Stagflation occurs when inflation remains high, but a country’s economy is not growing and its unemployment is rising.
The main example is when the U.S. experienced stagflation in the mid to late 1970s. High prices from OPEC oil embargoes drove inflation higher even as recession lowered GDP and increased unemployment.
Inflation can be caused in two main ways
- Demand-pull inflation
- Cost-pull inflation
Demand-pull inflation occurs when demand for goods or services increases but supply remains the same, pulling up prices.
It may be caused by the sudden popularity of certain products or in simple words during marriage seasons you may have seen a sudden increase in demand for gold which increases the price of gold.
Cost-push inflation occurs when the supply of goods or services is limited somehow, but demand remains the same, pushing up prices. Usually, some sort of external event, like a natural disaster, hinders companies’ abilities to produce enough of certain goods to keep up with consumer demand. This allows them to raise prices, resulting in inflation. During covid, we have seen an increase in the price of masks, sanitisers etc.
If money sits in a bank account it will lose its value, you can beat inflation and boost your purchasing power by investing your money in certain assets.
- Beat Inflation with Stocks
- Beat Inflation with Bonds
- or may be with gold
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