What is inflation and why does it impact your pocket?

Inflation is an economic concept that describes the continuous and widespread increase in the prices of goods and services in an economy over time. It is measured through price indices, such as the Consumer Price Index (IPC) or the Broad National Consumer Price Index (IPCA) in Brazil, which monitor the price variation of a basket of products and services representative of the average household consumption.

Por: Davi Vasconcelos em outubro 16, 2023 Última atualização em: outubro 18, 2023

Inflation occurs for a variety of reasons, but some of the main ones include:

Excessive Demand: When the demand for goods and services exceeds the economy’s production capacity, prices tend to rise, as companies can increase prices to balance supply and demand.

Production Costs: Increases in production costs, such as wages, raw materials and energy, can be passed on to the final prices of products.

Monetary Policy: Central bank actions, such as reducing interest rates or monetary expansion, can increase the amount of money in circulation, which can lead to an increase in prices.

Inflation can deeply affect people’s pockets in several ways:

Decrease in Purchasing Power: When prices constantly rise, the money you have loses real value. Over time, this means you can buy less for the same amount of money.

Impact on Fixed Savings: Those who depend on fixed income, such as retirees, may be particularly affected by inflation, as their income may not increase at the same pace as prices.

Difficulty in Financial Planning: Uncertainty regarding future prices makes it more difficult to plan for the long term and make financial decisions, such as investing or making large purchases.

Pressure on Interest Rates: Central banks often raise interest rates to combat inflation. This can result in higher interest rates on loans and financing, making credit more expensive.

Impact on Investments: Inflation also affects investments. If investment returns do not exceed the inflation rate, the money invested may lose real value.

To protect your pocket from inflation, it is important to take smart financial measures, such as:

-Invest Wisely: Consider investing in assets that have historically outperformed inflation, such as stocks, real estate and inflation-linked bonds.

– Diversify Your Portfolio: Spreading your investments across different asset classes helps reduce risk.

– Track Your Spending: Keep a budget and be aware of how inflation affects the cost of living.

– Take advantage of the Interest Rate: If you have debts, consider paying off the highest interest ones first, as interest rates can increase with inflation.

In short, inflation is an economic phenomenon that directly impacts people’s purchasing power. To prevent it from significantly harming your pocket, it is important to understand its effects and take measures to protect your financial assets and your quality of life.