What is Inflation?

You can get a clear idea of this article about ;

  •         What is inflation going to do for us?
  •         History of inflation 
  •         How do you measure the inflation 
  •         What are  the causes of inflation 
  •         Effect of inflation 
  •         Controlling inflation 
  •         Inflation rate in the U.K. 

What is inflation going to do for us?

Inflation is the British pound will not buy as much over time, which means it will not be as valuable tomorrow as it was today. It is often expressed as the annual change in pricing for common products and services, including toys, furniture, clothing, food, and transportation.

Deflation is the opposite of inflation and refers to a persistent drop in the general level of prices for goods and services. The inflation rate, which is the annualized percentage change in a general price index, is a commonly used indicator of inflation. 

The consumer price index (CPI) is frequently employed for this purpose because prices do not reflect all rises at the same rate. In the US, wages are also based on the employment cost index.


History of inflation 

What is inflation? Inflation assumes the existence of money, which emerged over perhaps 2500 years as an unexpected social construct as a result of several breakthroughs and improvements. 

Periods of inflation and deflation have historically alternated while commodity money was in use, depending on the state of the economy. However, when significant quantities of gold or silver are continuously injected into an economy, this may result in protracted periods of inflation.

From the 18th century onward, numerous nations adopted fiat money, which allowed for far greater changes in the money supply. In times of political unrest, countries’ money supply has swelled quickly, leading to episodes of extreme inflation that are much higher than those seen during earlier periods of commodity money. 

These episodes are known as hyperinflations. A significant example is the hyperinflation experienced by the German Weimar Republic. With an annual inflation rate of 833,997% as of October 2018, Venezuela currently has the greatest hyperinflation in the entire globe.

How do we measure inflation? 

There are three types of measuring inflation. 

There are demand-full inflation, cost-push inflation, and built-in inflation. 

The UK’s longest-running price fluctuation indicator, the Retail Price Index (RPI), was initially introduced in 1947, making such long-term insights feasible. Until the Consumer Prices Index (CPI) posed a threat in 1996, it served as the primary UK inflation indicator.

In the 12 months leading up to August 2022, the Consumer Prices Index (CPI) increased by 9.9%, down from 10.1% in July. August 2022 saw a monthly increase in CPI of 0.5% as opposed to 0.7% in August 2021.

What are the causes of inflation? 

Monetarists consider how quickly the money supply expands or contracts to be the primary factor affecting inflation or deflation. They believe that fiscal policy, which includes taxes and spending by the government, is unsuccessful at managing inflation.

“Inflation is always and everywhere a monetary phenomenon,” famously said monetarist economist Milton Friedman.

The long-term real value of output is defined by the economy’s productive capacity, according to monetarists, who also hold that monetary policy does not affect the velocity of money (at least in the long run). According to these hypotheses, variations in the money supply serve as the main force behind changes in the overall price level. The short-run value of nominal production, which is equal to final expenditure, is determined by the money supply when exogenous velocity (i.e., velocity determined externally and unaffected by monetary policy) prevails.


The short-run link between the money supply and nominal production does not necessarily follow from the formula since velocity is not exogenous in practice. However, over the long term, it is presumable that the development of the payments system will control fluctuations in velocity. The long-run growth rate of the money supply plus the exogenous long-run growth rate of velocity growth minus the long-run growth rate of real production determines the inflation rate if velocity is generally unaffected by monetary policy. 

There are 7 causes of inflation. 

There are ;

  • Primary Causes.
  • Increase in Public Spending.
  • Deficit Financing of Government Spending.
  • Increased Velocity of Circulation.
  • Population Growth.
  • Hoarding.
  • Genuine Shortage.
  • Exports.

A global rise in inflation started to happen in early 2021. Numerous factors have been identified as contributing to it, including supply constraints (particularly chip and energy shortages), price gouging, and, as of 2022, the Russian invasion of Ukraine.

Effects of the inflation 

Purchasing Power is Lower 

Your purchasing power is harmed by inflation, which is one of its most evident effects. Your standard of living will eventually drop if you are unable to purchase as many goods and services as you could before inflation.

According to Angelo DeCandia, a management lecturer at Touro University, “Essentials will take precedence over non-essentials as everyone seeks to stretch the buy side of their budget.” “Consider spending more on groceries and gas and less on entertainment and travel.”

According to Dan North, the senior economist at trade credit insurer Allianz Trade, families who were already struggling financially are impacted the most by having less purchasing power.

In reality, a 2021 study from the University of Pennsylvania discovered that higher-income households spent 6% last year than they did in 2019 or 2020, while lower-income households had to spend around 7% more. Keep in mind that in 2021, the inflation rate was 4.7% annually.

Reduced Savings 

You aren’t contributing as much money to a savings account if growing prices for necessities are reducing your budget’s flexibility. According to a Forbes Advisor-Ipsos study conducted in June 2022, 42% of participants were saving less money than normal.

Todd Steen, an economist from Hope College in Holland, Michigan, asserts that inflation reduces the value of all of our earnings and savings.

Reduced Savings

Loss of Goods and Services 

While certain sectors—such as those where consumers can’t put off purchases indefinitely, including supermarkets, gas stations, and funeral homes—perform reasonably well during inflationary periods, others completely fail,

That’s a result of customers only purchasing the goods and services they require during periods of high inflation.

If your vehicle requires repair, you will have it done. You’ll keep forking out cash for food.

You might not, however, take your children to a trampoline park. You can choose to go to a free city playground with the kids instead. Decisions like those are understandable when costs are high, but when taken together, they can hurt certain economic sectors.

Controlling inflation 

The Bank of England has historically increased interest rates in reaction to growing inflation. While this may encourage saving, it also increases some homeowners’ monthly mortgage payments. Raising interest rates increases borrowing costs and, it is anticipated, reduces consumer spending.

Monetary Policy Committee, (Federal Reserve Bank)

The main responsibility of the Monetary Policy Committee is to manage the UK economy’s inflationary pressures to maintain price stability and hit the target of 2% inflation.

An approach that is frequently used to manage inflation is a contractionary monetary policy. A contractionary strategy lowers bond prices and raises interest rates to reduce the amount of money available in the economy. As a result, prices drop, consumption declines, and inflation moderates.

After rising by 0.7% in the month, the annual CPIH goods inflation rate jumped to 13.2% in September 2022 from 13.0% in August. The annual inflation rate increased to 5.3% in September 2022 from 5.1% in August as a result of a 0.2% increase in CPIH services between August and September 2022.

The inflation rate of the UK 

For September 2022, the current UK inflation rate is 10.1%. The greatest increase in consumer prices in 40 years, rising 9.1% over the year ended in June 2022: U.K. Bureau of Labour Statistics, (U.K.)according to The Economics Daily.

Bottom line 

When you are struggling with inflation forecast in the UK, Although TV inflation is still high, internet media appears to have halted the increase; according to new statistics, UK media inflation in 2022 will rise, but less than the global average, a little less than early estimates.

In periods of high inflation, typically people who save money have their purchasing power eaten away with the increasing costs of living. The only way to have a chance of out performing inflation and keeping up with increasing costs is to buy assets, such like stocks.

If you are not investing you can expect that your real world returns on saved money will be negative. If you haven’t started investing then check out our broker review of Trading212. Where you can start investing with as little as £1.

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