Inflation vs Deflation and Why It Matters

What is inflation, what is deflation and what benefits to knowing? We’ll explain the basics and what you need to know to make sure your money keeps pace. Inflation and deflation are terms you hear thrown around a lot but what do they mean and what impact do they have on us? What is Inflation? The value of a dollar is determined by its purchasing power, the number of things or services which that money can buy. When inflation increases, the purchasing power or our dollar decreases. In the US, our rate of inflation is 3% a year on average. That means the newspaper that costs $1 now will cost $1.03 the following year. Inflation means your dollar doesn’t go as far as it once did. Types of Inflation Demand-Pull Inflation: This is caused when there is an increased demand for something which drives up the price. When demand grows faster than supply, the price goes up. Cost-Push Inflation:If the cost to produce a good increase, a company increases the price to maintain their profit margin. Monetary Inflation: This happens when there is too much money in an economy. Too much of anything makes the value or price go down. The Impact of Inflation Inflation is not always a bad thing across the board. There are winners and losers when inflation happens. If you owe money to a creditor, you win! The cost of your debt is reduced. You really make out if the rate of inflation is higher than the interest rate on your debt. Inflation hurts your savings. A dollar saved now is worth less in the future when you need to spend it. If your raise at work is not more than 3%, it’s not really a raise because it doesn’t preserve the buying power of your dollars. If you are someone who lives on a fixed income that is not adjusted for inflation, your dollar is worth less too. If inflation in one country is higher than that of trading partner countries, the goods of that country are more expensive than imported goods. That can impact domestic producers and in turn, their employees How Inflation is Measured Inflation is measured by