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Inflation is sustained growth in the general price level. Inflation is the same as a fall in the value of money, that is, you get fewer goods and services than before for a certain amount of money.This phenomenon is commonly measured using the Consumer Price Index (CPI).
The opposite of inflation, is deflation.
Consider it as the growth in the price level or, conversely, a decline in the purchasing power of currency. To comprehend inflation’s impact, let’s examine the CPI’s role in tracking this economic phenomenon.
Inflation example
To illustrate, imagine a scenario where a litre of skim milk cost $1 in 2015. Fast forward to 2020, and the same product now demands around $1.5. This real-world example showcases the tangible effects of inflation, as consumers find themselves paying more for the same goods over time.
Wage level and inflation
When the prices of goods and services go up (inflation), it’s reasonable to anticipate a parallel increase in wage levels.
Understanding real wages requires a calculation that involves subtracting consumer price inflation from the annual salary. Here’s an example: If someone consistently earns $50,000 per year for five years without any salary increase, but there’s inflation affecting the prices of products and services, the real wage reveals the actual purchasing power.
The outcome of this calculation might show that the standard of living was higher in the initial year. This is because, despite having the same nominal salary, the real purchasing power was greater due to the increased value of the salary at that time.
Fluctuating prices
While most goods and services generally experience a price increase, it’s important to acknowledge the inherent volatility within inflation measurements. Certain components, such as energy prices, can exhibit significant fluctuations from one measurement to another. These fluctuations are influenced by factors beyond the economic landscape, introducing noise when attempting to discern the underlying trend in price development.