Inflation is a measure of rising prices of goods and services within an economy. Inflation reduces the purchasing power of a currency. For example one million shillings today will be less valuable a year later. Inflation is an important metric for any economy and governments allover the world monitor and try to control it.
Causes of inflation
Inflation is generally caused either by increasing production costs or rising consumer demand. For example the price of bread will go up if the price of wheat goes up. Anything which affects the supply of raw materials for products can cause inflation. For example a prolonged drought will cause an increase in food prices. Election violence in Kenya will affect fuel prices in Uganda.
Prices can also go up because of increasing demand. Land prices around Kampala and Wakiso have steadily gone up because of the increased demand for land for residential purposes from the working middle class.
Hyperinflation occurs when you have run away inflation. When an economy is struggling governments are tempted to print more money to cover for reduced economic output. The increased money supply chasing after a limited supply of goods makes things worse. People lose confidence in their own currency and start hoarding valuable goods. This only makes things worse. Production stalls which constricts supply of goods. Governments print more money and the whole thing runs out of control. We have seen cases of hyperinflation recently in Zimbabwe and Venezuela.
Effects of inflation
Inflation erodes purchasing power of savings. On the other hand it can render some enterprises more profitable because of rising prices. Excessive inflation can make prices of essential commodities like food and electricity unaffordable to the citizenry which can have political ramifications. Hyperinflation can topple governments.
How to control inflation
Governments respond to inflation through fiscal and monetary policy. When inflation is low. Governments may lower taxes and the interest rates to encourage spending and investments. when inflation is high governments will increase taxes and interest rates to decrease public spending. Governments may also pursue different economic policies to encourage production. For instance a government may subsidize agricultural production to ensure food security and stabilize prices.
How you can protect yourself
There are several ways to protect yourself from inflation. As an investor or business owner you can invest in areas with rising inflation to benefit from higher prices. You should also invest in areas with a return which exceeds inflation so as to preserve your capital. You should also minimize saving in bank accounts because they hardly pay you any interest. As an ordinary citizen you should also strive to enter the production economy where you can control the prices you charge. Specialization in a field with scarce supply can help you demand better wages. For example as a neurosurgeon you will command better pay than a taxi driver.
Inflation is part and parcel of any capitalistic system. Knowing what inflation is and how it affects us can help us protect ourselves from its adverse effects