Q

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

A

Inflation decreases the value of a dollar — meaning you can buy less with that dollar over time.

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.

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