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Inflation is..

In chapter 1 we found out how hard it is and how long it takes to double an investment by simply put it on a bank account. And we didn’t even mention a powerful enemy for any money saver – the inflation.

If I ask my friends or colleagues ‘what is inflation?‘, the answer is always the same: something like ‘when prices go up, then we have inflation’.

If that answer would be wholly true, then the creator of inflation would be for example the nice lady, who owns a shop next to my house, where prices rise each time I’m looking to buy a pair of black leather shoes; or the pizzeria in our street, where my favorite dish, hawaiiana without ketchup, was 7 Euro this week, while last time I had dinner over there, the check was only 6 Euro. Do these friendly people in my street really create inflation, the enemy for any money saver?

Of course not. Inflation has it’s roots in the depreciation of money. This is not done by a restaurant or Carrefour or any other shop. The one and only institution who is able to manage this is the central bank of a country.
Why does the central bank create inflation? Well, the prime target is actually to stimulate the economy, inflation is a byproduct. To stimulate the economy, a central bank has one single option – lowering the key interest rate by printing new money and so inflate the money circulation of a country.

This might stimulate the economy in the long run, especially the export sector, but more money in circulation also means, that the value of money versus the produced goods and offered services is falling. Result: it takes more money to buy goods, services and to pay for imports from abroad, cause with an inflated circulation the national currency is loosing against foreign currency.

Inflation, created by the central bank, is here first, then prices in the shops are rising, not the other way round.

Worse than higher prices, cash savings of people getting hammered by inflation and are loosing in value. That’s why inflation is a powerful enemy, any money saver has to be aware of.

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In the next chapter, we take a look at the antipode of inflation – the deflation. And we will see, that deflation is a real beast – and sometimes even worse than inflation. http://www.theleader.ro/deadly-deflation/

 

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