Inflation, what is it ?

Inflation, a term thrown around by many people. Almost everyday the word inflation is in the news. It affects loan repayments. It is used during wage negotiations. It is measured and published. But what is inflation? How does it affect you?

Inflation Explained

The term inflation is a general description of the decreasing value of money over a period of time. In other words a certain amount of money will buy you less after a certain time. Lets do some shopping and fill a basket with items one buys regularly.

It is 2013 and your shopping basket consist of 1 liter of milk, a pack of coffee and a loaf of bread. Total price for the contents in your shopping basket is R60,00. Fast forward 2 years and buy the exact same items. It is highly likely that you will pay something like R66,00 or even more. The price difference in this case is inflation.

Causes of inflation

Inflation can be caused by increasing cost of labour, production cost and raw materials or due to demand exceeding supply. A good example of inflation caused by higher production cost is the cost of oil. Oil is used in most products either as a raw material or to transport goods. A drastic increase in oil prices will have a negative effect on prices and is a factor in inflation.

Oil prices on the other hand rise and fall for reasons relating to demand and supply restrictions and speculation.

Due to inflation workers want to get inflation related increases or higher wage increases to maintain a standard of living. This again pushes up prices for goods and services if production does not increase. So inflation is a perpetual cycle which can be difficult to control.

How is inflation measured.

Inflation is generally measured or calculated by measuring the change in price for a basket of goods purchased by an average consumer. This basket of goods will change over time due to changing consumer habits and new technologies.

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