What is Inflation and why Does it Matter?

CryptoMode What is Inflation

A lot of people simply do not understand how the financial system works. Whether that is due to ignorance, a lack of education, or not asking the right questions, may vary. Acquainting yourself with the core concepts is crucial in this modern day and age. 

Why is Inflation bad?

At its core, inflation will only occur when the average price of a good or service is increasing over a period of time. Whether this is an overnight change, or a gradual increase in price, the outcome will remain the exact same. 

When prices rise, consumers lose purchasing power. Their finances will buy them less than before, even though they might still be making the same amount of money since prices began to rise. 

Contrary to what most people may think, inflation does not just affect government spending. It is something every consumer on this planet will deal with in their lifetime. Thankfully, most of the inflation won’t trigger a cataclysmic shift. In countries such as Venezuela, Lebanon, and Argentina, however, things have gone from bad to worse. 

Determining the rate at which general price levels rise is often done by looking at historical data. Money is an ever-evolving creature, and all of its aspects will keep shifting around as well. 

For the people buying goods and services, inflation is a very big problem. Those who are effectively selling services and goods, tend not to mind as much. Earning more money for offering the same products and services is always positive. However, those people will also see the costs of their expenses rise, thus nullifying any “extra profit” very quickly. 

Triggering Inflation 

In theory, central banks – such as the Federal Reserve – are created to stave off inflation. That is much easier said than done, however. 

Keeping the inflation rate in check can often be done with little effort. In the long run, however, central banks may be forced to modify their monetary policies. Injecting more money into an economy – through stimulus checks, for example –  will often trigger long-term inflation. 

Contributing to possible inflation is the overall demand and supply of specific goods and services in a country. For example, if the demand for crude oil would surge globally, and there isn’t enough supply to meet demand, a price rise is likely to occur. This increase in price is a simple example of how inflation – even if it is just temporary – can be triggered at any given moment. 

A second form of inflation is triggered by an active increase in money supply. The Federal Reserve is injecting trillions of US Dollars into the American economy. That money is created out of thin air and not backed by any assets. More money can lead to more spending, which fuels demand and drives prices higher. 

Up next is the inflation triggered by an increase in production process input prices. Labor costs can, depending on where the workers are located, heavily influence the price of produced goods. As these costs go up, the consumer will end up paying the difference one way or another. 

Avoiding Inflation Issues

For consumers, there are ways to avoid [most of] the damage caused by inflation. 

Hedging against financial volatility has become increasingly popular in the past few decades. It is not an unnecessary luxury either, given the monetary policies maintained by central banks all over the world.

Several ways to hedge against inflation can be explored. Safe haven assets always tend to retain their value well, or even appreciate in value, when financial conditions are far from ideal. 

Some people remain hopeful that Bitcoin will fall into this category at some point as well. Given that asset’s volatility, however, that won’t always be the case.

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