Prices are constantly rising and purchasing power is declining at the same time. In a market economy, the price level can change. The decrease in the value of money is called inflation. Behind price increases lie causes such as a shortage of raw materials or problems in the logistics chains.
Understanding financial and economic relationships requires knowledge. What does inflation mean in simple terms and what are its consequences? How is inflation measured? What are the differences between inflation and deflation? In this article you will get answers to your questions!
The term "inflation" comes from the Latin language and translates as "to inflate" or "to inflate". Those who explain inflation simply use the term inflation. The cause is a decrease in the value of money with a simultaneous increase in the price level.
When the money supply grows faster than goods production, demand increases. As a result, average prices also rise. Increased raw material and production costs, higher tax rates or personnel costs can be responsible for the increased price level. Whether inflation affects Germany or the entire euro area depends on the extent of an economic crisis.
If purchasing power falls, you get less for the same amount of money than before inflation. If salaries and wages rise at the same rate as prices, there is no inflation. Normally, however, the level of wages and salaries increases more slowly than the increase in prices. Purchasing power decreases when there is more money in a country than there are goods and commodities available.
How is inflation measured? The inflation rate is an important indicator. It is calculated as a percentage and indicates the rate of price increase within a given period.
Inflation can have various causes. Possibly, too much money was printed by the central bank. The supreme bank in the state is responsible for printing banknotes.
However, the central bank acts on the orders of the government, which wants to settle outstanding repayments more quickly in this way. This cause of inflation is relatively rare nowadays. More often, economic bottlenecks, delivery delays, war and crises trigger inflation.
Currency devaluation affects all citizens. With prolonged inflation, there is a risk of further problems due to payment difficulties. Explained simply, inflation means that rising prices put a strain on your budget. The decrease in purchasing power leads to you paying more and more to maintain the standard of living you are used to. If your salary remains unchanged, you have less financial reserves available.
Inflation can affect all areas of life. Goods producers and service providers pass on increased costs to consumers in the form of price increases. As a result, many people have to cut back and do without some things.
Your financial investments can lose value during this phase. Because of low interest rates, saving is no longer worthwhile. As a result, you can expect losses when you invest your money. Is inflation good or bad? That depends on the perspective from which the general inflation is viewed.
Inflation is caused by an increase in the price of goods, commodities and services. While low inflation is normal and necessary for the economy, serious problems occur when inflation is high.
A distinction is made between different forms. These are:
Cost inflation results from an increase in production costs. This makes goods more expensive. Demand-induced inflation occurs when demand for goods and services increases. When supply does not grow sufficiently, the large demand cannot be met. The lack of available supply causes prices to rise.
Simply explained, imported inflation is based on problems in the procurement of raw materials, goods or commodities on international markets. The reasons for this are a lack of available supplies or supply bottlenecks. Companies pass on the higher high prices caused by expensive imports to consumers in the form of price increases.
These types of inflation exist:
Inflation and deflation are the two opponents in the battle of monetary forces. Simply explained, inflation means a loss of purchasing power. Deflation, on the other hand, is exactly the opposite. The general price level falls and the purchasing power of money rises. Suddenly, the credit balance in the account is worth more.
Deflation occurs when the supply of goods, commodities and services is greater than the demand. If prices keep falling, the entire economy is exposed to major risks. In a deflationary phase, bankruptcies accumulate. As a result, unemployment rises.
There are few job openings in relation to the high demand. As the economy is forced to implement cost-cutting measures, wage and salary levels are being lowered. As a result of falling wages, many employees are facing existential crises. Regular costs such as rent or insurance can no longer be paid.
Deflation can affect individual sectors or the entire economy of a country. There are many causes of deflation. The main causes of deflation are:
However, deflation occurs much less frequently than inflation. Inflation and deflation are risk factors for a functioning economy and a stable banking system. Price stability is important to avoid payment problems.
A loss of purchasing power due to inflation affects your savings. How is inflation measured? The inflation rate is calculated on the basis of the average price development within a year. An inflation rate of up to five percent per year is considered normal. The maximum five percent inflation rate is not threatening to the economy. This is why it is called "healthy" inflation.
If the rate of price increase is very high, the money in your account will lose value. Your savings plans, shares and other investments are also affected by this loss in value. Inflation cannot be prevented. Protect your savings by investing them wisely. Avoid large sums in your checking account. You won't get any interest on it.
Financial goals are projects for which a budget is needed. This can be building a house, buying a new car or taking a vacation. Long-term financial goals such as financing a course of study or financial security in old age can only be achieved with sufficient reserves.
When price increases cause high costs, you can save less. At the same time, your saved money loses value. Since it is impossible to predict how long inflation will last, long-term financial planning is not possible.
You should postpone larger purchases in your own interest. Review your financial goals. Are your plans still on track? Have your financial needs changed?
Reduce your consumption and spending behavior. Think about how you can avoid unnecessary spending. Keep a budget book. This will give you a better overview of your finances.
Are you self-employed and run your own business? Then you're probably used to controlling your income and expenses on a regular basis. During an inflation, your Business exposed to higher risks. The initial, promising growth phase can be followed by a sudden standstill.
To offset the financial consequences of inflation, it is important to generate entrepreneurial growth. In the Business Coaching Program for self-employed people, entrepreneurs and managers, you will learn how to achieve sustainable success and fulfillment in your business.
Dealing with a difficult financial situation can be learned. Use these five strategies to protect your buying power:
We will show you how to handle money in the free masterclass: never worry about money again. You'll get practical and immediately applicable tips for more money in your life. Use the knowledge to protect your purchasing power and shape your financial future!
Even in difficult situations, it is possible to maintain control over your finances. Set financial goals. Learn how to manage money. Protect your purchasing power by avoiding unnecessary spending and investing prudently.
