Are you shocked how based on your calculations in a reliable pf calculator online your savings are not worth what you had projected it to be in the past? Well the reason may be inflation. Inflation is one of the key economic terms you should know in order to understand how the economy and your personal financial situation work. It’s also one of those topics that tends to confuse people, especially because there are so many different definitions floating around out there. Fortunately, we’ve always found it helpful to break things down into easy-to-understand steps. So, if you’re looking for quick actionable advice on determining whether or not inflation is running rampant or just a small blip on the radar, keep reading as we discuss the impact of the inflation on the economy and how you can prepare yourself for it.
1. Erodes Purchasing Power
The most obvious effect of inflation is that it erodes the purchasing power of your money. Your money will not buy as much today as it did yesterday, and over time, it will likely lose more and more purchasing power until you can’t even buy what you could yesterday. Inflation is a general increase in the prices of goods and services, but it’s not just about price increases. Inflation erodes the value of your money. Hence it is also about a loss of purchasing power. Your money buys less because it costs more to do the same things, like buy groceries or fill up your car with gas. On the other hand when inflation is low, the purchasing power of the money rises. As a result, people who want to buy goods and services now have more money to do so. This means that the demand for goods in the market increases as consumers’ spending power increases.
2. Raises Interest Rates
Inflation also raises interest rates because lenders have to compensate borrowers for the loss in value of their money. As inflation increases, borrowers have less purchasing power to pay back loans with. That makes lenders more likely to charge higher interest rates to compensate themselves for the increase in risk that they face because they have less capital invested in your debt repayment plan.
Additionally, when there is inflation, lenders have to charge borrowers more interest to compensate them for the fact that their money is worth less. In other words, if lenders are making money, they will have to charge more interest on their loans because their profits will be diminished by inflation.
3. Hurts those with lower income disproportionately
A key effect of inflation is that it disproportionately hurts those with lower income. When prices rise, the prices of goods and services that are most important to lower-income households do so at a faster rate than other products. This means that they tend to spend a larger portion of their budget on keeping up with rising prices, rather than on other items such as food or shelter. As a result, inflation can lead to less spending overall, which in turn reduces demand and employment opportunities for lower-income households. The lower your income, the more money you need to sustain your standard of living. As inflation erodes the value of your savings and investments, it makes it harder to get by in retirement. Inflation is a tax on savers, which means it discourages saving and encourages spending now. It also makes the real value of future income less predictable, which increases the risk of defaults on debt and other obligations. To estimate how much inflation will affect you based on your income bracket you can use an inflation calculator inr or usd depending on the currency of the place you live in.