We're hearing the inflation word everywhere at the moment, but what exactly does it mean. Well it is the term used to describe rising prices. How quickly prices go up is called the rate of inflation.
A good way to think about it is the value of the money in your pocket. What can you buy with your money today compared with what could you buy with it in the past. Many of us have seen the price of food and other supermarket goods increasing, so it actually costs us more money to buy the same things. That is down to inflation.
Another way to look at it is that 'a dollar today is always worth more than a dollar tomorrow'.
So the value or worth of your money is effectively eroding over time due to inflation and the higher the inflation the more the prices increase. Let's take a simple example of a loaf of bread:
If a loaf of bread cost you $2 one year ago but the same loaf of bread is now costing you $2.50 then inflation has increased the cost of the loaf by 25%. You have to spend more money for exactly the same loaf!
Now we all know prices go up over time, it's just a thing right? But in periods of high inflation like we have now it becomes very noticeable. This is because inflation impacts most things in the economy so you will see an overall increase in the total amount you spend on all groceries, clothes, eating out, leisure, travel etc.
The overall rate of inflation in the US for the 12 months ending in September 2022 was 8.2%; economists use a basket of products and services to get the average price increase which is called the CPI (Consumer Price Index). So all else being equal you need 8.2% more income to buy exactly the same things that you did a year ago. Where do you get the money from?
In reality it is most likely to come from your existing employer because as inflation increases the pressure from employees to increase wages also increases. The problem is that in an increasing inflation environment the pay increases are always going to be behind the rate of inflation so we ultimately lose out until inflation starts to reduce.
In an environment of rising prices you need to do everything you can to keep your spending down, ways to do this are:
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USEFUL LINKS: How the Rich Get Richer, Are Central Banks Being Honest