Remember when you could buy a coffee and a pastry for under $5? Or fill up your car for a fraction of what it costs now? Those days seem like a distant memory, thanks to inflation.

Inflation is the steady increase in the price of goods and services over time. It means your money buys less than it used to, eroding your purchasing power and making it harder to achieve your financial goals.

But what exactly causes inflation? While it’s a complex economic phenomenon, here’s a breakdown in simple terms:

1. Demand-Pull Inflation: Too Much Money Chasing Too Few Goods

Imagine a popular concert with limited tickets. As demand for those tickets surges, the seller can increase the price because people are willing to pay more to secure a spot. Similarly, when demand for goods and services outpaces supply, prices rise. This can happen when:

• The economy is booming and consumers have more money to spend.
• Government spending increases, injecting more money into the economy.
• Interest rates are low, making borrowing cheaper and encouraging spending.
  
  

2. Cost-Push Inflation: Rising Production Costs

Think about the costs involved in making your favourite pair of jeans. If the price of cotton increases, or the factory workers demand higher wages, or transportation costs rise, the manufacturer has to raise the price of the jeans to maintain their profit margin. This ripple effect of rising production costs pushes prices upward for consumers.

3. Built-in Inflation: The Wage-Price Spiral

As prices rise, workers may demand higher wages to keep up with the increased cost of living. This, in turn, can lead businesses to raise prices further to cover their increased labour costs, creating a self-perpetuating cycle of wage and price increases.

4. Imported Inflation: Global Pressures

We live in a globalised world, and inflation can be imported from other countries. If the price of oil or imported goods increases, it can impact domestic prices, even if there’s no change in local demand or production costs.

5. Monetary Policy: The Money Supply

Governments can influence inflation through monetary policy, primarily by controlling the money supply. If the government prints too much money, it can lead to inflation by increasing the amount of money in circulation relative to the available goods and services (remember the concert ticket analogy?).

How Inflation Affects You

Inflation impacts your finances in several ways:

• Erodes Purchasing Power: Your money buys less, making it harder to afford everyday essentials and achieve your financial goals.
• Reduces Savings Value: Inflation diminishes the value of your savings over time. If your savings aren’t growing faster than inflation, you’re effectively losing money.
• Impacts Investment Returns: Inflation needs to be factored into your investment strategy to ensure your returns outpace rising prices.
• Creates Uncertainty: High inflation can create economic uncertainty, making it difficult to plan for the future.
  
  

What Can You Do?

While you can’t control inflation, you can take steps to mitigate its impact:

• Negotiate Salary Increases: Regularly review your salary and negotiate increases to keep pace with inflation.
• Invest Wisely: Invest your money in assets that have the potential to outpace inflation, such as stocks, real estate, or commodities.
• Reduce Expenses: Look for ways to reduce your expenses and live below your means.
• Increase Income: Explore opportunities to increase your income through side hustles, investments, or career advancement.
• Stay Informed: Keep up-to-date on economic trends and inflation forecasts to make informed financial decisions.
  
  

Inflation is a complex economic force that affects us all. By understanding its causes and impact, you can take proactive steps to protect your finances and achieve your financial goals, even in an inflationary environment.