Inflation: What It Is and How It Works

Shawn Plummer

CEO, The Annuity Expert

Inflation is a term that gets thrown around a lot, but many people don’t know what it means. In simple terms, inflation is the increase of prices over time. It occurs when the demand for goods and services outstrips the available supply. This can happen for a variety of reasons, including an increase in population or an increase in the money supply. This guide will explore how inflation works and why it is important to understand.

What Is Inflation?

Inflation is the increase in the price of goods and services over time. It occurs when the demand for goods and services outstrips the available supply. This can happen for a variety of reasons, including an increase in population or an increase in the money supply.

How Does Inflation Work?

Inflation happens when there is more demand for goods and services than the available supply. This can be due to an increase in population or the money supply. When demand outstrips supply, prices go up. The amount of inflation is measured by the Consumer Price Index (CPI).

Why Is Inflation Important?

Inflation is important because it can have a major impact on your finances. You will have less purchasing power if prices go up, but your income doesn’t. This can make it difficult to afford necessities like food and housing. Inflation can also lead to higher interest rates, impacting your ability to borrow money.

What Causes Inflation?

There are a variety of factors that can cause inflation. For example, an increase in population can lead to more demand for goods and services. This, in turn, can cause prices to go up. Another factor that can cause inflation is an increase in the money supply. When more money is chasing the same number of goods and services, prices will go up.

Is Inflation All Bad?

Inflation is often thought of as bad, but it can be helpful in certain situations. For example, if wages are not keeping up with the cost of living, inflation can help close that gap. Additionally, inflation can encourage people to spend rather than save, boosting economic growth. But, of course, too much inflation can be a problem, and that is why central banks work to keep it in check.

Types Of Inflation

There are two main types of inflation: demand-pull inflation and cost-push inflation. Demand-pull inflation occurs when there is too much money chasing too few goods. This can happen when the economy is growing too quickly or when there is an increase in the money supply. On the other hand, cost-push inflation occurs when costs rise, causing prices to increase. This can be due to an increase in the cost of raw materials or an increase in wages.

How Is Inflation Measured?

Inflation is measured using various methods, but the most common is the consumer price index (CPI). The CPI measures the prices of a basket of goods and services typically purchased by consumers. The CPI is then used to calculate the inflation rate, simply the percentage change in prices from one period to another.

How to Combat Inflation

There are several ways to combat inflation, but most involve some price control. For example, the government can institute price controls, forcing businesses to keep prices at a certain level. This can be effective in the short run, but it can also lead to shortages and other problems in the long run. Another option is to let wages and prices adjust naturally, eventually leading to equilibrium.

How Can You Protect Yourself From Inflation?

There are a few things you can do to protect yourself from inflation. One is to invest in assets that will increase in value as prices go up. Another is to have a diversified portfolio so that if one asset class decreases in value, others may increase to offset the loss. Finally, you can try to keep your expenses low so that inflation doesn’t impact your purchasing power as much.

How Can You Keep Up With Inflation In Retirement?

One of the biggest concerns for retirees is inflation, as it can eat away at their savings. However, retirees can do a few things to keep up with inflation.

  • One is to invest in assets that tend to increase in value during periods of inflation, such as real estate or commodities.
  • Another option is to use an inflation-adjusted annuity, which will provide an income stream that increases yearly (YOY) along with prices.
  • Finally, retirees can plan to spend less as they age, which will help offset the effects of inflation.

Final Thoughts

Inflation is a complex topic, but it is important to understand the basics. By knowing how inflation works, you can make more informed decisions about your finances and the economy.

Do you have any questions about inflation? Leave a comment below and let us know! We would love to hear from you.

If you found this post helpful, share it with your friends and family! And if you want to learn more about investing, be sure to check out our other guide. We cover many topics, from beginner tips to more advanced concepts. So until next time, happy investing!

What Is Inflation?

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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