So, What is Inflation? and why you should know about it?

In short, Inflation is a situation of increasing prices of goods in an economy.

In short, it refers to the rise in the prices of general goods and services of daily or regular use, such as food, clothing, housing, recreation, transport, consumer staples, and many more.

 The opposite and a rare event is ‘deflation’ that is fall in the prices of general goods and services of daily or regular use.

Inflation rates that are too high or too low can be harmful to an economy. There should be an appropriate trade-off.

So, what is a desirable inflation rate?

It varies from nation to nation. In Europe, for example, most central banks prefer an inflation targeting of 2 percent to 2.5 percent. Some economists suggest that in times of recession, a higher inflation rate target, such as 3 per cent, should be maintained. This can stimulate faster growth by keeping interest rates low for a longer period.

So does inflation affect common people? the answer is definitely "Yes". it affects each person in an economy.

Let's take an example of A common Ice Cream,

in the 1970s its price was  .25$, 1980s its was .45$, in 1990s  .75$, in 2000 1$, in 2010 2$ and now in 2020 2.5$. so this is how inflation has affected the price of ice cream over time.

Now let's see what causes it?

There are two causes of inflation.

Among the 2  common one is "demand-pull inflation". That's when demand rises faster than supply for goods or services. Buyers require or need the product so much that they're ready to pay higher prices. 

and the second one is  "Cost-push inflation", which is a less common cause, this happens when supply is restricted but demand is not. for example, if suddenly a foreign imported product is banned, then prices of that product will rise quickly as demand would still be there.

Some sources say that an increase in the money supply also causes inflation. Which is a misunderstanding of the theory of monetarism. which states the primary cause of inflation is the print out of too much money by the government. As a result, too much capital follows too few goods. It generates inflation by triggering either demand-pull or cost-push inflation.

now let us see an example of How  It Impact Savings?

Over time, inflation can reduce the value of your savings, this happens because the prices of services and goods rise by some per cent every year,

now suppose you keep 100$ in your piggy bank and open the piggy bank after 25 years that 100$ money may not be able to buy as much 25 years into the future as you are able to do now. While you haven't actually lost money, you end up with a smaller net worth because inflation eats into your purchasing power.

but if you would have invested that money somewhere where returns rates are higher than inflation then you would have ended up getting 500$, 1000$ or even more depending on the rate of return, suppose you bought 100 shares of a start-up company for 100$ and after 25years the company the cost of per share becomes 100$ so definitely you beat the inflation rate.

so if you keep your capital that is the currency in your own locker then with time its value is going to decrease. so its better to invest in places that would beat Inflation and give you more returns.

In many countries, employment contracts, pension benefits, and government entitlements are bound to a cost-of-living index, typically to the consumer price index. A cost-of-living adjustment adjusts salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually in low inflation economies. During hyperinflation, they are adjusted more often.