Inflation is a general price increase over time, meaning things would get more expensive. When inflation happens, the prices of daily expenses and luxury items will increase, while the amount of money earned from work will remain the same.
For example, if you usually earn $2000 USD monthly from work, you would spend $1500 on groceries and rent. However, $500 would remain, you could spend or save it. But if inflation occurs and your essential monthly spending rises by 5%, your essential spending would be around $1600, reducing your monthly savings by 20%.
Impact on consumers
1. Cost of Living
Inflation affects the overall cost of living, leading to a higher price for essential goods and services. Everyday items such as groceries, transportation, and healthcare. When the cost of things rises faster than income, then financial strains would increase.
2. Savings and Investments
Savings and investments would be affected due to inflation because if the rate is higher than the interest earned for savings, the value of the savings would decrease over time. Moreover, with inflation, investments might also crash because smaller companies might be affected by various factors, such as the discretion of customer demand. Demand might decrease since most people would face economic issues, in which they won’t have enough money to afford materials other than the essentials.
3. Wage Adjustments
Due to inflation, employers would adjust the wages of employees. However, even though the wage is increasing, it might not always fully compensate for the increased cost of living.
4. Economic Uncertainty
Investments for certain companies might be extremely difficult, this is because inflation usually might come with deflation or another inflation, which would create various types of economic uncertainties. The insatiable economic situation might cause investigation uncertainty, resulting in hesitant investigation, and consumers may delay purchases or reduce spending.
Reference List
Investopedia. (2023). Inflation: What It Is, How It Can Be Controlled, and Extreme Examples. [online] Available at: https://www.investopedia.com/terms/i/inflation.asp [Accessed 29 Nov. 2023].
RUGABER, C. (2023). Fed’s Waller raises possibility of a rate cut by spring if inflation keeps slowing. [online] AP News. Available at: https://apnews.com/article/inflation-interest-rates-economy-federal-reserve-growth-fa6c5ed8992041e2bd8e0d5276337daa#:~:text=Inflation%2C%20measured%20year%20over%20year,what%20I%20want%20to%20see.%E2%80%9D [Accessed 29 Nov. 2023].
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