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To truly understand Inflation, let's view it through the eyes of a swimmer. This is because, inflation is a terror in today’s economy, it is important to understand how it works, so that you don’t miss your turns.
Let's Say...
Let's Say...
- As the popularity of swimming rises, more people begin to join swim teams as humans realize that swimming is the best sport. This causes rapid inflation because competitive swimmers often use high-tech suits to improve their times at races. There is a huge demand for these products that now exists.
- Therefore, the price of tech suits increases. This is rapid inflation as the price of 1 item, in this case, price of swimsuits increase and it is the center of the economy. Because the economy is doing extremely well, people have the ability to buy these suits and therefore the price rises, or Demand-pull inflation. This will drive the cost of suits higher as the company now has to produce more of the product.
- However, if the cost to make the new LZR X racing suit costs hundreds of millions to test, engineer, advertise, and create, then this situation becomes Cost-push inflation, where the product production costs so much, that the company now has to raise the price of the product in order to make a profit!
- Now, inflation causes a huge domino effect because if one item that is the center of the economy, that means that everything relies on it. This can effect almost every product on the market today. For example, since the popularity of swimming increases, that means that electricity bills increase as more swimming facilities are created. This affects normal people, as electricity bills increase and so do electronics that need to be charged with outlets.
- Also, prices of water increases as millions of gallons of water will be used for these new pools. What else do pools now need? Food. Prices of hotdogs, pretzels, and chips, will increase dramatically as they will need millions of these for major meets. See? Inflation in one product can really affect lots of things!
- Inflation hurts many people, mostly banks/ lenders, consumers, businesses and even the retired. For lenders, the amount of buying power that their money has now, will be lower as inflation makes money worth less
- Consumers now have to pay more for the products that used to get for less.
- Businesses will be affected in almost the same way. The price of electricity, now raised due to usage in pools, make businesses have to pay more for this service now.
- Lastly, the retired are hit hard. As their monthly pension money will stay the same, regardless of inflation. So, $500 might have sufficed a few years ago, now it may not buy what these people need.
What can you do?
- Trust in the FED, Federal Reserve System as they can make monetary policies with and discuss with economists on ways to lower Inflation.
- Buy Bonds: issued by the government. These are a guarantee for people. These bonds will have the same buying power today and in 20 years. It follows the inflation rate and so in 20 years, $1000 could turn into $1500, but will allow you to buy the same things.
- Invest in Stocks: although it is risky, if it pays off, you can really beat the inflation rate. But if the stock crashes, then you will be left with even less money.