Do you know how inflation affects your wallet? Understand how it works and how it affects our daily lives.
Do you know what inflation is?
Inflation is characterized by the general and continuous increase in the level of prices in an economy. To measure this phenomenon, we use the Consumer Price Index (CPI), which tracks the variation in prices of a basket of products and services consumed by households.
Various factors can influence inflation. The demand for goods and services, the amount of money in circulation, and the expectations of economic agents are some of the forces at work in this context.
How does inflation impact the economy?
Inflation has significant effects on the economy, affecting spending and investment decisions, income distribution, and countries’ competitiveness.
When inflation is high, consumers tend to spend more, as they expect prices to increase in the future. On the other hand, companies may be discouraged from investing due to uncertainty about future returns.
In addition, inflation can affect income distribution. Those with fixed income or assets not indexed to inflation may see their purchasing power decrease during periods of high inflation.
Countries’ competitiveness
Finally, inflation can affect the competitiveness of nations. If inflation in a country is higher than in its trading partners, its goods and services may lose competitiveness in the global market.
How central banks act to combat inflation
Central banks play a crucial role in controlling inflation. They use tools such as interest rates and monetary policy to influence the amount of money in circulation, and consequently, control inflation.
