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What’s inflation and how does it affect your purchasing power?

Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

Inflation isn’t a particularly complicated concept. All the stuff you spend money on — be it milk, rent, hairspray or movie tickets — can be bundled up together to come up with what’s called “cost of living.” As the cost of living rises — a number reflected in what’s called the consumer price index, or CPI — that dollar that used to buy two candy bars now barely buys one. That’s inflation.

So how does inflation affect you? It affects you greatly if your salary doesn’t at least rise with the rate of inflation, meaning that even if you make the same salary, you won’t be able to afford to buy as much. (In the last decade, the inflation rate in the UK has varied greatly by year, from .2 % to over 4%.) It will adversely affect those who keep a great deal of cash on hand since over time, what might have once looked like a considerable amount of money will look considerably smaller, since the money simply won’t buy nearly what it once would. The only beneficiaries of inflation are those with negative assets—that is, those in debt. Someone who owes a huge amount of money should celebrate higher than normal inflation since it means that even if the number of dollars she owes hasn’t changed, the value of what she actually owes is objectively lower thanks to the power of inflation.

Last Updated December 8, 2017

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