Prices constantly fluctuate sometimes up sometimes down. Lately, prices seem to be consistently going up, that’s due to inflation. When the prices of goods and services show a constant increase, inflation takes hold. This means that the buying power of currency decreases over time, causing $1 today to have a lower value compared to its worth in the past. Here’s what inflation is and how it affects you every day.
What is inflation?
Inflation is the increase in the general price level of goods and services over time. It is a measure of how much the buying power of a currency declines as prices rise. When inflation occurs, the same amount of money buys fewer goods and services, reducing the value of money. Inflation can be caused by various factors, including an increase in money supply, high demand for goods and services, and rising production costs. It is measured using the Consumer Price Index (CPI) and has significant impacts on individuals, businesses, and the overall economy.
How is inflation calculated?
To calculate inflation, a basket of goods and services is typically used as a representative sample of consumer spending patterns. This basket includes a variety of essential items that people typically purchase, ranging from food and beverages to housing, transportation, healthcare, education, and entertainment. The prices of these goods and services are tracked over time, and changes in their prices are used to calculate the inflation rate. By including a diverse range of goods and services, the inflation calculation aims to reflect the overall changes in consumer prices and provide an accurate measure of inflation’s impact on the cost of living.
What effect does inflation have on your life?
One of the most immediate impacts is the decrease in buying power. As prices rise over time, the value of our money becomes less valuable, making it more challenging to afford the same goods and services. Everyday expenses like groceries, transportation, and housing become more expensive, potentially limiting our ability to save or invest for the future. Additionally, inflation can lead to uncertainty and volatility in the economy, influencing interest rates, wages, and job security. It can also affect investment returns and the value of assets, impacting our long-term financial goals.
Being aware of inflation’s effects allows us to make informed decisions, adjust our financial plan, and seek opportunities to reduce its impact on our daily lives. Working with Wisely Advised, we know the impact of inflation and carefully consider the effect it has on your portfolio.