In economics, inflation means a rise in the general price level of goods and services over a period of time. As the prices rise, each piece of currency buys fewer goods and services. This means that the purchasing power of the money is less. Inflation is measured by an inflation rate, or the annual percentage of change in a general price index over a period of time. In the United States, it’s based on the Consumer Price Index, or CPI, which shows the changes in retail prices of consumer goods such as food, clothing, and cars. It is because of inflation that current consumers pay more for everyday items than their grandparents did, or even then they themselves did only a decade ago.
Inflation can cause negative effects such as a decrease in the real value of money over time. It may cause uncertainty in consumers and cause them to slow their investments and savings, or to hoard goods, which causes shortages. In difficult times such as these, many consumers turn to companies like Money Mutual to get in touch with short term loan lenders. Also known as payday loan lenders, these companies help people through rough financial patches by lending them up to $1000 at a time.
However, inflation can also positively affect an economy by ensuring that banks can adjust the interest rates to avoid or minimize the impact of recessions. Due to this fact, the majority of today’s economists believe in a steady inflation rate over time, and they charge the central banks with keeping it this way.
The most important thing to understand about inflation is nominal versus real interest rates. A nominal interest rate is not adjusted for inflation, while a real interest rate is, and is therefore calculated by the nominal rate minus inflation. The real value of assets is not their dollar amount, but what they can potentially buy, so inflation is key. For example, if you earn 5% interest per year on a saving account, and inflation has been calculated to be 4% per year, you are really only earning 1% interest on that money.
There are several securities that can be used to protect assets from inflation, such as a Treasury Inflation-Protected Security that is backed by the federal government, a Municipal Inflation-Linked Security, a Corporate Inflation-Linked Security that is issued by a company, an Inflation-Linked Certificated of Deposit that are insured by the FDIC, and Inflation-Linked Savings Bonds backed by the government.
Though these securities can protect you from loss due to inflation because they adjust frequently, be aware that these options are not known to provide high returns on investment. That is why they aren’t as common as other types of savings accounts.