Inflation is usually identified as a sustained upward trend in the price of goods and services in an economy. It also corresponds to the economy’s currency losing purchasing power – meaning that it takes more and more units of currency to buy a certain amount of goods and services as inflation continues.
Inflation affects any product or service, including utilities, automobiles, food, medical care and housing. The prevalence of inflation in an economy affects individual consumers and businesses because it effectively makes money less valuable. In short, inflation reduces a consumer’s purchasing power, makes savings less valuable and delays retirement. Central banks around the world monitor inflation so that they can respond effectively. The U.S. Federal Reserve, for example, has a 2% inflation target. Should inflation rates rise beyond the intended target, the system adjusts its monetary policy accordingly to combat inflation.
What Causes Inflation?
In economics, inflation is a measure of rising prices of goods and services in an economy, which often leads to a decline in the purchasing power of the economy’s local currency.
Put simply, inflation means that the same unit of currency used to purchase a basket of items today will only be able to purchase fewer items over time due to rising prices.
Check out the table below to see how prices for certain items have changed between 1960 and 2021 in the United States:
A popular metric to measure inflation is the Consumer Price Index (CPI), which is calculated by the Bureau of Labor Statistics (BLS) and examines the weighted average of various price baskets of goods and services used by specific groups of households for daily living. These baskets include food, shelter, transportation, doctors’ and dentists’ services or drugs, and are categorized differently for people living in rural or urban settings.
It is worth noting that the CPI can be a controversial index, as the exact methodology and data used to calculate CPI is not publicly available. Further, many believe that this methodology does not accurately measure inflation across the country and economy, as epitomized by the ever increasing cost of housing, healthcare, and education. Adding to this, the method for calculating CPI has also undergone more than 20 changes over the past several decades, adding to the narrative that it is not an accurate measure of inflation.
Causes of Inflation
Demand-Pull Effect
Demand-pull inflation occurs when consumer demand for goods outpaces the supply available, pushing the prices of said supply up.
This effect tends to occur when there is an increase in the supply of money and credit available to consumers, often resulting from employment increase in an economy or a government spending money more freely.
Cost-Push Effect
The cost-push effect is when the price of goods increase as a result of production costs, which includes raw materials and employee wages.
For the prices to increase, demand for the product must remain steady as the production cost for said product keeps increasing.
Built-in Inflation (or Wage Push Inflation)
Build-in inflation occurs with the idea that people expect inflation rates to continue, particularly with the Federal Reserve’s target of keeping a 2% inflation rate per year.
With this expectation in mind, there is an increase in wages across industries, which increases consumption rates, further pushing prices of goods and services up.
Is inflation here to stay?
Inflation has been more of a persistent than a transitory phenomenon of late. Largely driven by the global response to the pandemic, financial markets are seeing a steady rise in inflation rates worldwide.
While high inflation rates may still subside eventually, Yahoo argues that inflation is here to stay for the following three reasons:
- Supply and demand imbalances in the labor market
- Rising prices in real estate
- Entry prices that are expected to move up as well.
If inflation continues at current rates, the purchasing power of wealth held in dollars will be cut in half over the next eight years.
About PECULIUM
PECULIUM has always been a company driven to democratize access to investment opportunities previously only available to the very wealthy. The development of blockchain technology has been a key factor in enabling this ongoing financial revolution. But blockchain goes beyond offering a more efficient replica of the traditional financial ecosystem-it enables new business models that are better aligned with the incentives of all market participants.
PECULIUM has developed saieve.io, a crypto investment and asset management platform that connects to exchange accounts and allows users to instantly access vetted trading strategies and investment portfolios. Founded to simplify trading strategy for users without any technical experience, PECULIUM has a growing offering of automated investment products.
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