Inflation

What Is Inflation?

Globally, many people have come across the word inflation. What does it mean? We share in this article some of its characteristics, causes, and impact to understand it.

 

Characteristics of Inflation

The main characteristic of inflation is rising prices. The occurrence does not have to be across all products or services. The increase usually affects items that have a ripple effect on the economy.

 

Examples include petrol or gas. These play a role in many parts of the economy, increasing the prices of linked items like transportation and the costs of essential items.

 

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Causes of Inflation

  • Weakening Currency

In some cases, a currency weakening can be a driving factor of inflation. For example, the Kenyan Shilling is losing its value against the US (United States) Dollar by more than 15% since the beginning of 2023. Many predict that it will continue losing strength.

 

The currency loss is greater than the current inflation rate. The impact is price increases across imported products since many international sellers prefer payment in US (United States) Dollars.

 

  • Supply Shortage

Just like the previous characteristic, inflation can occur due to a shortage in the supply of items. For example, during a pandemic, many goods are in limited amounts due to restrictions on movement. The limitation means a slowdown in production.

 

In some cases, such shortages cause items that historically lose value to sell at price points higher than the purchase amount. Examples include second-hand cars.

 

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Impact of Inflation

  • Business Closures & Layoffs

The lifeline of businesses is cash flow. Many people have to re-prioritize expenses when facing a reduced ability to buy goods or services. For example, some families may choose to reduce or stop eating out.

 

The effect is a reduction in business income that can lead to closure. Some establishments can reduce staff to try to remain afloat.

 

Conclusion

Inflation can occur due to various reasons beyond the ones in this article. Aim to get investment returns higher than the rise of the costs of goods and services to try and cushion yourself from its effects.

 

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