Inflation is when you find yourself spending more money for the same item. Food during the time of your grandparents was extremely cheap compared to the prices today. That is not to say that the food then was less or of lower quality. In fact, the quality and quantity was even probably more.
However, before you start blaming the rising prices for commodities as the reason for inflation, think again. Rising prices can actually bring down the inflation rate or stop it from further increasing.
A main force why prices start going up is because demand is increasing and the supply is not equal and cannot meet the demand. When this happens, then you see prices going higher because retailers, as well as wholesalers, want to maximize their profits while “the going is good.”
When the prices of commodities go too high, then the demand will slack off because some people may decide that they don’t really need that commodity after all. As the demand slows down, prices will also drop, and so will the inflation rate.
Sometimes, the government will insist on price control, thinking that this will stop inflation and panic buying. At the same time, government might start spending their financial reserve to try to keep up with the demand, and hopefully stop the supply from increasing. These are inflationary actions, and can even slow down sustainable economic growth.
You should also realize that before you start screaming blue murder that the inflation rate is skyrocketing, you have to remember that some commodities are seasonal. In order words, they peak at certain times of the year, and their prices can increase tremendously during its peak. This isn’t inflation because it is a temporary cycle that is expected.
At the same time, during times of crisis, say, a political turmoil, war or calamity, prices can temporarily balloon, but this will usually go back to normal as soon as the situation normalizes.
On the other hand, if it is truly a case of inflation setting in, there are several effects that may personally affect you, as a consumer. Some of these harsh effects are lower purchasing power, reduced earnings, loss of stability and economic flexibility, less chances of getting a long term loan, and the killer effect which is higher interest rates.
If you are a businessman, then you know that any loan you have taken out that is subject to interest that changes with the tide will zoom up like crazy. Trying to keep payments schedule is going to be a challenge, and banks usually don’t give a lot of allowance on late payments or defaults. Naturally, they have become phobic about late payments and possible defaults.
Now, if a country cannot control inflation, then you will have widespread unemployment, and the capital assets of small to medium sized businesses will be traumatized. Usually situations like these will last a few years at the most. Government should take a strong hand in preventing inflation to continue by not enforcing artificial shortages and demand. A government with sound economic policies will always be able to weather any inflation crisis.
QUOTE OF THE DAY:
“We are certainly doing things that could lead to a lot of inflation. In economics there is no free lunch.” – Berkshire Hathaway (BRK.A) Chairman Warren Buffett
CONCLUSION
There is a need to understand inflation especially if you are a businessman. It is false to hope that if you are working for a large corporation, that you are immune to the effects of inflation. Today, the best way to keep your job is to do your job – very well.
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