London, UK — Inflation is a general increase in prices and a fall in the purchasing power of money. The inflation rate is a measure of the annual percentage change in prices. It shows how fast prices are rising and thereby eroding the real value or purchasing power of money. Inflation decreases the real value of money – a dollar today buys fewer goods and services than a dollar did a year ago. The purchasing power of money is falling as prices rise.
Inflation represents a loss of purchasing power for people who hold money. Savers are also hurt by inflation because the value of their savings is eroded by rising prices. Inflation expectations play an important role in inflation. They are a major determinant of how much inflation people are willing to tolerate.
FinancialCentre broker Joe Delaney said, “If inflation is running at 10 per cent, you’re only getting two-thirds the purchasing power for your dollar than you had last year. The other third of its value has been eroded by inflation.” He further explained, “If you’re on a fixed income, say from Social Security or a pension, your purchasing power is being eroded. That’s why it’s important for people to have some inflation protection in their investments.”
Rise in inflation after a pandemic
The world has seen a dramatic rise in inflation after the outbreak of the novel coronavirus (COVID-19) pandemic. Global prices for food, energy and other commodities have soared as demand has outstripped supply. The pandemic has led to a sharp increase in the prices of essentials such as food and fuel, while the prices of other goods and services have also started to rise. This has put pressure on the budgets of households and businesses and has led to a rise in inflation.
Many people are worried about the potential impact of inflation on their standard of living. While a small amount of inflation is generally considered to be good for an economy, too much inflation can be damaging. When inflation is high, it can erode the value of savings and wages, and make it difficult for businesses to plan and invest for the future.
On June 25, the annual inflation rate in Zimbabwe jumped to 191.6 per cent, more than double the consumer price increases observed two months ago, according to official statistics. Inflation, which was at 96.4% in April, rose to nearly 200 per cent as food prices are rising owing to Russia’s aggression in Ukraine.
With inflation in the future expected to be higher than it has been in recent years, some investors are reliving memories of hyperinflation witnessed a decade ago when inflation reached such heights that the central bank in 2008 produced a 100-trillion-dollar note that is now a collectors’ item. Following that, the government abandoned the local currency and accepted the US dollar and South African rand as legal tenders. The Zimbabwean dollar has been gradually losing value since the government restored it in 2019.
In the meantime, the International Monetary Fund (IMF) has authorised the release of $1 billion in assistance for Ecuador as part of two evaluations of its loan package. Last year in September, Ecuador received a $6.5 billion IMF loan over the course of 27 months, with $4.8 billion paid thus far.
Joe Delaney commented on the situation, “The IMF money will help Ecuador’s government tide over the immediate crisis, but it is only a stop-gap measure. The real challenge for the country is to get its economy back on track so that it can repay the loan and avoid further debt traps in the future.”
While inflation can be a problem for any economy, developing countries are particularly vulnerable to the negative effects of inflation. This is because they often have weaker institutions and are less able to manage the effects of inflation. In addition, developing countries tend to be more reliant on imported goods, which can become more expensive when global prices rise. Inflation can also have a significant impact on poverty levels. When prices rise, it takes more money to buy the same amount of goods and services. This can lead to an increase in the number of people living in poverty, as well as exacerbating existing poverty.
Joe Delaney said, “Inflation is a particular problem for the poor, as it hits them the hardest. When prices rise, they have to spend a larger proportion of their income on essentials, leaving them with less money to spend on other things.” He added, “Inflation can also lead to social unrest, as people become angry about the rising cost of living.” It is therefore important for developing countries to take steps to protect themselves from inflation. This includes having strong institutions and policies in place to manage the effects of inflation, as well as diversifying their economies to reduce their reliance on imported goods.
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