Why do we have inflation, and why inflation is a problem?

Inflation is bad. And why is it so? Its because it makes your money worth less in the future.

Let’s cite an example: A man wants to buy a car for $24,000. In a world without inflation, the
man can save for the car and pay for it in the exact amount. But since there is such a thing as annual
inflation, the car would cost $26,225--- an increase of $2,225.

Here’s another example: in 1913, a table would cost $20. Today. That very same table would cost
$470. That is an increase of 2,253%.

Let us cite the causes of inflation:

1. Growing Economy
In a growing or expanding economy, unemployment drops and wages usually rise. As a result, more
people find themselves with more money in their pocket, which they’re willing to spend on luxuries as
well as necessities. This higher demand allows suppliers to increase prices, which in turn leads to more
jobs, which puts more money in circulation, and round and round it goes.

2. Expansion of the Money Supply

An expanded money supply can also drive demand-pull inflation. This happens when the Fed prints
money at a rate higher than the growth rate of the economy. With more money in circulation, demand
grows and prices go up.

3. Government Regulation
The government can impose new laws or tariffs that make it more expensive for companies to produce
goods or import them. They pass on those higher expenses to consumers in the form of increased prices.
This results in cost-push inflation.

4. Managing the National Debt

When the national debt skyrockets, the government has two main options. One is to raise taxes to make
its debt payments. If it hikes corporate taxes, companies will likely shift the burden onto consumers
through higher prices. This is another scenario of cost-push inflation.
5. Exchange-Rate Changes
When the value of the U.S. dollar dips in relation to foreign currency, it has less purchasing power. In
other words, imported products – the majority of consumer goods bought in America – become more
expensive to buy. Their cost goes up. The resulting inflation is viewed as the cost-push kind.

At its worst, inflation can seriously lower the value of the money you’ve invested and saved for
retirement. It can also set off a vicious cycle that sparks a recession. With an overall decline of purchasing
power, consumers drastically cut back on spending, even on necessities. As a result, businesses cut back
on investing and spending, and they lay off workers. Unemployed workers, in turn, spend less than they
used to, causing businesses to let even more people go. At its worst, inflation can seriously lower the
value of the money you’ve invested and saved for retirement. It can also set off a vicious cycle that sparks
a recession. With an overall decline of purchasing power, consumers drastically cut back on spending,
even on necessities. As a result, businesses cut back on investing and spending, and they lay off workers.
Unemployed workers, in turn, spend less than they used to, causing businesses to let even more people
go.

Inflation erodes purchasing power or how much of something can be purchased with currency.
Because inflation erodes the value of cash, it encourages consumers to spend and stock up on items that
are slower to lose value. It lowers the cost of borrowing and reduces unemployment.

Furthermore, inflation encourages spending. A predictable response to declining purchasing power is

to buy now, rather than later. Cash will only lose value, so it is better to get your shopping out of the way
and stock up on things that probably won't lose value. For consumers, that means filling up gas tanks,
stuffing the freezer, buying shoes in the next size up for the kids, and so on.

Inflation can be considered as a vicious cycle with the urge to spend and invest in the face of inflation
tends to boost inflation in turn, creating a potentially catastrophic feedback loop. As people and
businesses spend more quickly in an effort to reduce the time they hold their depreciating currency, the
economy finds itself awash in cash no one particularly wants. In other words, the supply of money
outstrips the demand, and the price of money—the purchasing power of currency—falls at an ever-faster
rate.

So, if your assets are in danger of being overcome by the rapidly rising waters of inflation, what
can you do? How can you go ahead?
 You have to grow your assets faster than the rate of inflation. In other words, you will have to
outpace it. To do so, you will have to invest in stocks or real estate which both have a track record of
beating inflation. For example, stock has earned a premium of 6.6% premium over inflation over time. So
if you were to invest a $1,000 today and earned 6.6% each year, you will have $6,803 in 30 years. And
that is after inflation.

When inflation is too high, it is not good for the economy or individuals. Inflation will always
reduce the value of money, unless interest rates are higher than inflation. And the higher inflation gets,
the less chance there is that savers will see any real return on their money. Although in theory that should
be good for the economy, by encouraging people to spend rather than save.

Inflation is an important force that can dictate the performance and stability of an economy. Too
much inflation, too little inflation, or a negative inflation value can harm an economy. In order for
economies to move forward in a stable manner, slow and steady are desirable characteristics for inflation
to show.
As for us people, we have to constantly get a raise to keep up with the prices of goods.
High inflation is also not good for people who have long-term investments in banks, as it may erode the
value of money.

Inflation means you have to pay more for the same goods and services. ... But if your income
doesn't keep pace with inflation, your buying power declines. Over time, inflation increases your cost of
living. If the inflation rate is high enough, it hurts the economy.