What Is Inflation, and What Causes It?

The word “inflation” is frequently mentioned in financial discussions, but what does it truly mean? In what ways does it influence the economy and our daily lives? As a knowledgeable consumer and investor, understanding inflation and its impacts is key to ensuring you make smart decisions about your monetary matters.

Inflation might seem difficult to understand, but it’s actually not all that complicated. In fact, you can actually see the causes of inflation in all sorts of areas, from news and politics to supply and demand and even the latest market trends. Getting a grasp of how all of these factors and more work can help you anticipate future developments and make sure you’re adequately prepared.

Landmark National Bank is here to help you learn more about the effects of inflation and how you can best manage your money in response to constantly changing trends. Our friendly team of financial experts has the tools and expertise necessary to navigate inflation and many other issues you may encounter. Keep reading to learn more about the causes of inflation and other financial tips.

What is Inflation?

Inflation is an economic phenomenon characterized by the gradual rise in the prices of goods and services. Essentially, it implies that the purchasing power of your money diminishes as time goes on. And as inflation rates continue to rise, each passing year further erodes the value of your investments, savings, and spending cash.

The Consumer Price Index (CPI) is a key tool used to measure inflation. It tracks the average change over time in the prices paid by consumers for standard goods and services, including everyday items like food, housing, healthcare, and transportation. By monitoring these prices, the CPI reflects how much purchasing power your money has lost due to the increase in prices. This makes the CPI a strong indicator of the economic health of a nation.

Impact of Inflation

Inflation can have both positive and negative effects on the economy and our everyday lives. On the positive side, a moderate level of inflation (around 2-3% per year) can stimulate economic growth by boosting consumer spending and encouraging business investment. It can also help reduce debt burdens, as the value of the debt decreases over time.

However, high and unpredictable inflation can be harmful to the economy and consumers. It can lead to a decline in the purchasing power of money, leading to higher prices and lower real incomes. It can also create uncertainty and discourage investment, as businesses may be unsure about the future value of money. Inflation can also hurt retirees and savers who depend on fixed-income investments, as their purchasing power decreases over time.

What Causes Inflation?

Inflation is typically caused by an increase in the supply of money or a decrease in the supply of goods. When the amount of money in an economy exceeds the amount of goods and services available, prices rise. This can happen for many reasons, including:

More money coming in: When the U.S. Federal Reserve puts more money into circulation or lowers interest rates, it can increase the money supply in the economy, leading to higher demand for goods and services and higher prices.

Demand-pull inflation: When demand for goods and services exceeds the supply, producers must find ways to keep up. Most of the time, this is done by raising prices.

Cost-push inflation: Whether it’s wages, raw materials, or logistics and transportation, the cost of producing goods and services can often go up. As a result, companies must raise customer costs to accommodate.

Expectations: If people expect prices to go up in the future, they may speculate on stocks, demand higher wages, or even hoard goods, which can all lead to higher prices.

How to Fight Inflation

To effectively manage inflation, governments and central banks utilize two fundamental tools: monetary policy and fiscal policy.

Monetary policy encompasses a range of actions undertaken by the central bank to regulate the money supply and manipulate interest rates. For instance, when confronted with high inflation, the central bank may proactively raise interest rates as a means of curbing the money supply and consequently reducing the overall demand for goods and services within the economy.

On the other hand, fiscal policy revolves around the government’s decisions relating to public spending and taxation. For example, during periods of elevated inflation, the government may opt to tighten its belt by implementing spending cuts or imposing higher taxes. These measures aim to restrict the demand for goods and services, thereby mitigating inflationary pressures on the economy.

If you’re wondering how to fight inflation as a consumer, there are some things you can do. Investors must understand the smartest ways to optimize their decision-making to respond to changing trends. Assets like stocks and real estate may offer protection against inflation, as they tend to appreciate over time. Conversely, fixed-income investments such as bonds can lose value in an inflationary environment. Being well-informed about inflation helps set you up for strategic action regarding saving, spending, and investing, ultimately improving your financial health.

By wisely using these tools, both you and governments and central banks alike can effectively fight inflation and help maintain economic stability and prosperity.

Stay Up-to-Date on Inflation

Keeping yourself updated on inflation trends is vital for managing your personal finances and investments. Regularly checking the CPI and reliable financial news sources is one of the most effective ways to keep track of inflation trends. Many financial news websites and publications provide updates on inflation rates, as well as expert analysis of what these figures mean for the economy. Subscribing to reliable newsletters and podcasts can also be beneficial, as these often include detailed reports, analyses, and forecasts about inflation.

Get Expert Financial Advice from Landmark National Bank

Inflation is a complex topic, but understanding its impacts on the economy and our everyday lives is essential for making sound financial decisions now and in the future. By being informed and proactive with your spending, savings, and other money management, you can mitigate the effects of inflation on your personal finances and investments.

At Landmark National Bank, we’re committed to helping our customers navigate the effects of inflation and any other financial issues they may face. We offer smart, practical financial advice that can help you achieve all of your immediate and long-term goals. Between battling inflation, managing your savings, or planning for retirement, we’re here to help! Give us a call or contact us online to get started today.