A simple explanation of one the greatest dangers to your pocket.
Inflation is basically the rising cost of goods and services which erodes the value of savings. Imagine this scenario: Penny has saved $100 and has it in the bank at an interest rate of 4%. She pats herself on the back at the end of the year because of her efforts she has managed to earn $4 in interest bringing her available money to $104. However during that year, the costs of living went up 4%. Penny has effectively made nothing. Now think of this if Penny had a lower interest rate than 4%, she would be going backwards. This is the reason why people invest their money in other ways to try and achieve a significantly higher rate of return than the inflation rate. Safe investments often referred to as inflation proof securities are things such as Gold and Silver. The regulator for inflation is usually the central bank (Reserve bank if in Australia). The RBA tries to keep inflation down around 3%.
Demand pull Inflation
Why does inflation occur, lets have a look: Fruitshop owner John sells apples, he sells all of his 110 apples each day. This is where demand pull inflation kicks in. John wants to eat 10 apples, so he does and raises his prices 10%. The apples are in such high demand, people pay the price and John sells 100 apples, eats ten and makes the same amount of money. Of course John does not even have to eat the 10 apples, he can just increase his prices 10% and though he only sells 105 apples, he is happy because on saturdays there is a huge demand for apples so he will have a stock of over 130 apples to sell on Saturday.
Cost push Inflation
Book shop owner Paul employs Sally who likes to eat apples, but she can not afford the price increase so Paul gives Sally a pay increase and raises the price of his books to cover the cost. Fruitshop owner John is sending his kids to school, and he needs to buy some books but the prices have gone up.. he will have to increase the price of his apples.
Meanwhile, Penny is putting her money in the bank so she can save up to buy her children books once they begin Uni...
Inflation is basically the rising cost of goods and services which erodes the value of savings. Imagine this scenario: Penny has saved $100 and has it in the bank at an interest rate of 4%. She pats herself on the back at the end of the year because of her efforts she has managed to earn $4 in interest bringing her available money to $104. However during that year, the costs of living went up 4%. Penny has effectively made nothing. Now think of this if Penny had a lower interest rate than 4%, she would be going backwards. This is the reason why people invest their money in other ways to try and achieve a significantly higher rate of return than the inflation rate. Safe investments often referred to as inflation proof securities are things such as Gold and Silver. The regulator for inflation is usually the central bank (Reserve bank if in Australia). The RBA tries to keep inflation down around 3%.
Demand pull Inflation
Why does inflation occur, lets have a look: Fruitshop owner John sells apples, he sells all of his 110 apples each day. This is where demand pull inflation kicks in. John wants to eat 10 apples, so he does and raises his prices 10%. The apples are in such high demand, people pay the price and John sells 100 apples, eats ten and makes the same amount of money. Of course John does not even have to eat the 10 apples, he can just increase his prices 10% and though he only sells 105 apples, he is happy because on saturdays there is a huge demand for apples so he will have a stock of over 130 apples to sell on Saturday.
Cost push Inflation
Book shop owner Paul employs Sally who likes to eat apples, but she can not afford the price increase so Paul gives Sally a pay increase and raises the price of his books to cover the cost. Fruitshop owner John is sending his kids to school, and he needs to buy some books but the prices have gone up.. he will have to increase the price of his apples.
Meanwhile, Penny is putting her money in the bank so she can save up to buy her children books once they begin Uni...
No comments:
Post a Comment