What is Inflation?

Published: 05/14/24

Hello! Today’s topic is: Inflation.

Inflation is when the prices of goods and services increase. With that being said, inflation is not always a bad thing. In fact, there is an entire sector of government called the Federal Reserve which deals completely with inflation. 

Inflation is the backbone to economic growth. If there was no inflation, and prices always stayed the same, people would have less incentive to spend their money. Think about it, if you knew that a couple months down the road various goods would be more expensive, you would be more inclined to buy them right now. This tool is used in order to keep money flowing.

Deflation occurs when prices start to become cheaper, and while on the surface this seems good, it leads to a halt in the economy. Inversely, if you know that a couple months down the road various goods would be less expensive, you would be more inclined to save your money right now and buy it later, leading to the flow of money slowing down immensely.

So, how does the Federal Reserve control this? Interest rates. Like the previous blog stated, interest rates is the percentage that you have to pay when taking a loan out from the bank. If the Federal Reserve lowers that interest rate, making it more affordable, people are more likely to spend their money and vice versa. 

Overall, inflation is another factor that you need to keep in mind when planning for your financial future. While you may have a plan to save $20,000, in the future, that $20k might not be able to buy as much stuff as you had planned. Naturally, in the future, the same amount of money will be able to buy less goods and services, which is why it is so important to recognize this factor while planning.

As always, the earlier you invest, the more compound interest will help you make more money.