Inflation affects everyone, everyday regardless of social standing or income level. Through high inflation, the value of money is decreased resulting in less purchasing power.
What is inflation?
Inflation is the way increases in pricing is measured over time. The Consumer Price Index (CPI) is the most common measurement of inflation. CPI is used to track the purchases of hundreds of items over time. The figures are inputted into a formula to calculate the average increase in the cost of products.
Some inflation is necessary for a stable economy. Without high inflation or with low inflation, the price of goods can drop leading to the possibility of a recession. If inflation becomes too low then the drop in the price of goods can trigger a deflation. Deflation increases the probability of a recession or even a depression if the deflation is severe enough. CPI helps to predict when inflation is becoming too high or too low.
As inflation increases, the buying power of money decreases which decreases the standard of living. An increase in money coming in becomes necessary in order to maintain the same standard of living. The cost of basic necessities, such as food, gas, and utilities, means less money is left over for discretionary spending and savings. Most people will switch to cheaper options or drive farther for cheaper bargain pricing.
Inflation is also used as the benchmark to determine limits in contributions to retirement plans and increases in Social Security benefits. The federal government considers inflation as a benchmark in setting those standards from year to year. Inflation also forces interest rates to go up on loans including mortgages and credit cards.
How can you protect yourself against inflation? According to the U.S. Money Reserve, the best way to protect against inflation is to diversify away from paper money. Investing in commodities such as natural resources, purchasing shares in a mining company, or purchasing gold can help to protect against inflation. The value of gold often increases during inflation instead of decreasing. Everyone is affected by inflation; the U.S. Money Reserve can help control the effect on your finances.