What Is Inflation?

Inflation is an economic condition characterized by a decline in the purchasing power of a currency over a period. Inflation signifies that a currency has lost its value less than it used to. That is, a unit of a currency like $10 with the purchasing power to buy a bunch of bananas can now buy less than a bunch.

Inflation is a term used to describe the rate at which the value of a currency is falling, and at the same time, the prices of goods and services are rising. The increase in prices of general household commodities such as food grains, fuel, utilities like electricity, transportation, and services like healthcare and labor while the value of the fiat for purchasing them decreases is called inflation.

What Is Inflation?

Inflation refers to a currency losing its value over time, leading to a rise in the price of goods and services. The price of a bottle of coke that used to cost half a dollar rises to about $2, and a Mercedes Benz sold for about $5000 now costs about $10,000. The increase in the price is directly caused by the drop in the value of the currencies.

According to John Maynard Keynes, “inflation is not a horrible thing in some situations, and can boost the economy and create new jobs during downtimes.” This part of inflation is mainly relegated to the background. Because over the years, inflation has been used to describe the fall in price value and the decline in the standard of living.

Inflation encompasses different economic conditions such as the overall increase in prices, the increase in the cost of living in a region, and the price of goods and services. In general, inflation represents how much more expensive or how the goods/ services have increased over a period under review.

Inflation in crypto looks similar. However, there is a bit of difference. Cryptocurrencies are affected by inflation, whereby their price value will surge. Albeit, primary crypto tokens like Bitcoin are designed to resist inflation. Even when they are affected by inflation, the effect is less than that of inflation on fiat currencies. This is possible because Bitcoin has a limited or finite supply. Similarly, since a new amount of bitcoin can be mined till it reaches 21 million units, and the new ones become halved every four years, the inflation effect on it and other similar tokens will always reduce.

Over time, we have seen investors diverting their funds into purchasing digital assets during inflation. The dollars and Euros are losing value while being kept in the bank, so the viable alternative to save their worth is to invest them in cryptocurrency. Similarly, tangible assets like gold can also be used to preserve value for money during inflation.

How Does Inflation Occur?

Every country has dealt with various levels and degrees of inflation. Inflation is not drastic; it builds up over time until it becomes glaringly visible across society. There are several ways in which inflation can occur.

Stable inflation that spans a long period and mostly has adverse effects on the economy is the result of lax monetary policy. In this situation, the money supply in circulation grows too big compared to the economy’s size, thereby diminishing the currency’s value. More money is in circulation compared to the available goods and services. So the excess money is chasing limited commodities, increasing the price of those commodities. This scenario highlights the relationship between the money supply and the size of the economy. It is called the quantity theory of money.

Inflation can occur in response to the pressure on the supply or demand side of the economy. Economists and experts describe some things as supply shocks that can disrupt production. They include natural disasters, high gas or oil prices, etc. These various happenings can raise production costs, reduce overall supply and lead to “cost-push” inflation.

Consequences of Inflation

From a macroeconomic standpoint, those are the main consequences of inflation:

• Increased demand: As a seller, one of the best ways when the products and services you are rendering becomes highly demanded is during inflation. Most times, sellers of tangible assets are eager to sell during inflation as it raises the price of such commodities.

• Increased spending: When inflation reaches its optimum level, spending is encouraged. Experts advise that spending during inflation is better than saving, and high spending will boost economic activities.

• Higher resale value: During inflation, tangible assets become expensive because the price increases. For instance, a landed property you bought for $1000 before inflation may rise as high as $3000 during inflation.

• Decrease in value: Investors or holders of assets denominated in their home currency, including cash or bond, detests inflation because it erodes the actual value of their holdings. So most currency-driven assets look at their value during inflation and have reduced purchasing power.

• High standard of living: The standard of living becomes high during inflation. The purchasing power of your money becomes weak. The commodity you bought for less becomes high, and affording essential commodities for low-income earners becomes difficult, leading to a high standard of living.

Conclusion

Inflation is a double-edged sword. While it adversely affects the economy and the people, primarily low-income earners, it is considered a reasonable period for resale assets and commodity sellers.

There are several degrees and levels of inflation. The more the economy is growing, the more it absorbs and cushions the effect of inflation.

The viable way to control inflation is for the government to introduce and implement measures through monetary policy. The Central bank or other government regulators will ensure the proper money supply is released into the economy and ensure price stability.