People talk about inflation in many ways, such as inflation is causing consumers to have fewer purchasing options, because inflation is causing price increases.
There have been periods where inflation of wages has not kept up with the buying or purchasing power of the past.
The website, www.Investopedia.com defines inflation in the following manner: “The rate at which the general level of prices for goods used and services is rising and subsequently purchasing power is falling.”
Central banks attempt to stop severe inflation and deflation in an attempt to keep the excess group of prices to a minimum.”
Another way of putting it might be to say that controlling inflation is an attempt to keep the consumer’s head above water.
For the layman, there is a certain simplicity that can be applied. As people make more money, they buy more things. As more things are offered, the more that is spent. This may lead to a wage increase which the company will recover by raising the price of the products or services it provides.
Naturally, the use of credit such as the old-fashioned charge account at the local grocery store or drug store, to the use of bank cards that allow people to incur an excessive amount of debt, thus limiting their buying power for other things, while trying to pay off the debt that has accumulated, because the cost of the items purchased and the interest rates charged on outstanding balances.
Thus there is no way to avoid some level of inflation. However, there are certain factors about inflation that come from different sources that may help to explain the process.
Understanding inflation and its impact on individual purchasing power is difficult. Therefore, some terms must be explained, and questions answered.
What is inflation?
As already noted Investopedia defines inflation as, “The rate at which the general level of prices for goods used and services is rising and subsequently purchasing power is falling.” Perhaps a definition that is more useful to the average person would be: “Why do I keep making more money, but my buying power decreases.”
The simple answer is that inflation is increasing at a faster rate than income. Therefore, some of how to determine what is inflation going to do to that five-percent raise you get every year. There are several approaches on how to calculate the inflation rate. There are numerous methods, some involving advance math, others that make predictions and some that are based on the increase of spendable income.
Some calculators used by government agencies, economic departments of universities and other entities are very complex and require advanced math skills. . There are tools the average consumer can use.
Online Inflation Calculator: There are many of these calculators available to the average user. Some show past rates of inflation, while others may attempt to predict inflation.
Calculating past inflation rates:
The Inflation Rate Calculator, found at www.usinflationcalculator.com is easy to use and can provide a historical perspective. The calculator is simple. First, you type in a given year. For this example, we will use 2013. Then you enter the price you paid for an item. We will assume a wide-screen television for $300. Then you put in the year that would follow to determine what the rate would be in that yea.
The calculator only works up to 2015, and advances as data is collected. The calculator shows that in that relatively short time-span the item would cost $307.32 or a cumulative rate of inflation of 2.4 percent.
Viewing the Total Picture
Using the calculator above gives you a picture of what has happened, but it dos not take into account all the factors such as improvements in the increased cost of transportation and your other factors.
Now assume the year is 1965 and color televisions were beginning to dominate the market. They also sold for $300. However, you decided to wait 10 years before buying the color TV in 1975. The longer waiting period would have driven the cost up to $512 or a cumulative rate of inflation of nearly 71 percent. Furthermore, everyone knows that color television advanced considerably over that ten-year period accordingly is going to cost more. Thus the question is raised, are you paying more because of inflation or because of improvements in the product or possibly both.
How do you calculate the inflation rate?
It gets to be a little more difficult. There are numerous factors that have to be taken into consideration. The website, www.inflationData.com, offers a step by step formula for calculating the inflation rate. The issue is that it would take a considerable amount of time and some advance math skills to make manual calculations. Furthermore, if you pick a base year of 1950 instead 2000, the resulting answer is misleading.
However, looking at www.usainflationcalcuatior.com shows that the rate of inflation since the year 2000 has not been consistent. Thus, taking an average for that set of years can be misleading. For example, the inflation rate in the year 2005 was 3.4 percent. It peaked at 4.1 percent in 2007. It dropped to 0.1 percent in 2008; hit 3 percent in 2011 and in 2014 it was at .8 percent.
Thus to get a better idea of inflation vs. buying power, it is necessary to examine the CPI Inflation Calculator, provided by the Bureau of Labor Statistics. For example, it shows that $1,000 in 2000 has the same buying power as $1,385 in 2015. That means the piece of furniture you saw for a $1,000 in 2000 will now cost $1,385. That is an example of inflation.
The average person will usually buy what he needs when he needs it and will not gamble on inflation going down or up. However, it is necessary to be prudent in your purchases. For example, credit cards are not bad things, as long as they are handled with caution and for needed purposes. Interest rates on consumer loans and credit cards are very different from the Consumer Price Index and the rate of inflation.
Therefore, managing money comes down to the common-sense approach includes the following:
Are you putting any money aside in savings?
Are you planning for your retirement?
Do you avoid impulse buying?
Do you budget your income?
Inflation will continue. Some items needed for some products will go up in price. Other items, such as the price of oil may go down. However, while this reduces the cost of gasoline, it affects royalty income for the federal and state governments and individual and can lead to decease in available jobs.
We make more money than the previous generations. We have more options for investing and spending. The goal is to find the balance that lets you benefit from higher wages without loses any increases to inflation. It is not a particularly easy task, but one that can be accomplished by saving some money each month, paying bills on time, remembering that credit cards use should be limited, and some desired but unnecessary products do not have to be purchased on credit.