Inflation is an economic term that describes the general increase in prices of goods and services over time in a specific geographic area, usually a country. As inflation increases, the purchasing power of the currency decreases, meaning that each unit of the currency buys fewer goods and services. This is an important aspect to understand because inflation has a direct impact on your finances and purchasing power.
How does inflation affect you?
First of all, if your income isn’t keeping up with inflation, you’ll find that your money isn’t stretching as far as it used to. You may have to pay more for the same goods and services compared to before, which may lead to you having to adjust your budget.
Second, inflation can affect your investments. If inflation is high, it can erode the value of your investments, especially if the return on your investments is lower than the rate of inflation.
Third, if you are a borrower, inflation can actually be in your favor. This is because the value of the money you pay back in the future will be less than the value of the money you borrowed. But it is important to note that this only applies if interest rates do not rise in line with inflation.