Inflation – What Is It And Why You Should Be Worried

Inflation is the rate of price increase over time. It is used to show the overall increase in prices/cost of living in a country. High inflation means that prices are increasing for most items. As items increase in price the purchasing power of individuals decreases which means that the money in your pocket is worth less than it was before – Basically, with high inflation prices keep going up.

What Is A Good Inflation Rate?

To help maintain financial stability and future planning, the UK and U.S. Governments aim for an inflation rate of around 2%.  Inflation above 2% is considered to be high.

What Are The Current Inflation Rates?

The UK Consumer Prices Index (CPI) rose by 9.9% in the 12 months to August 2022, down from 10.1% in July.  The U. S. inflation rate also peaked in July at 9.1%.

inflation u.s.

Data from shows that the Eurozone peaked in July 2022 recording a record inflation rate of 9.1%.

inflation euro area

Why Is The Inflation Rate So High?

Worldwide increases in inflation began in 2021. There are many reasons for changes in the inflation rate but the recent surge in prices is generally linked to the pandemic; governmental fiscal and monetary stimulus (particularly large increases in money supply); supply chain issues (which have been preventing goods from reaching customers); price gouging (unethical companies raising prices above normal rates – also known as greed); and more recently the Russian / Ukraine conflict and embargoes on Russian gas and other products.

These have combined to cause inflation to increase and food prices to rise at the fastest pace in over 40 years.

When Will Inflation Rates Drop?

Inflation is expected to drop during the rest of 2022 but it is not expected to drop quickly. The supply chain issues are beginning to ease and oil prices are starting to fall which are positive signs for a reduction in inflation rates, however, there are many other factors linked to inflation.

Why Should YOU Be Worried?

The purchasing power of a currency is the quantity of goods and services that can be bought with one unit of the currency. High inflation means that currencies are losing purchasing power.

“One U.S. dollar could buy 10 bottles of beer in 1933. Today, it’s the cost of a small McDonald’s coffee. “

What you can buy with your hard-earned cash has dropped drastically, but this is acceptable if basic incomes have increased to overcome this loss but this has not happened –  Salary increases have not been matching the rate of inflation.

How Much Are You Losing?

The UK government provide a handy calculator enabling you to compare your salary (increase) with the changes in the rate of inflation.

The example I used was for an average yearly income of 50,000 Pounds Sterling.

For earnings of 50,000 per year.  To keep up with the current inflation rate, your pay next year would need to increase to 54,300 per year. An increase of 4,300.

But, average salaries in the UK are not increasing at a rate equal to inflation, and those with earnings of 50,000 will be, on average, 1,550 worse off per year after a salary increase.

Loss Of Your Purchasing Power Over The Last 40 Years

The average inflation rate from 1960 to 2021 was 3.8% per year. This resulted in an overall price increase of 829.57 %. An item that cost $100 in 1960 costs $929.57  in 2022. Source

Your Money Is Disappearing – Who Is Affected The Most?

If you are on a fixed salary or other income which doesn’t move with inflation when prices go up, inflation will reduce the amount of money you have to buy products or services.

The Elderly

This often affects the elderly who rely on fixed retirement incomes. In the U.S. this has a greater effect on the elderly because they often have medical expenses which rapidly increase during times of high inflation. Even when you get a cost-of-living increase each year it isn’t going to help when the cost of living continues to rise.

People Who Are Poor Or On Low-income

Those people who were already living on a tight budget before the inflationary increases will be having to make some cuts. Since the pandemic, many people have seen wages go up in the U.S but according to the Pew Research Center, the average wages for employees in low-income jobs are falling behind.

“Lower-income workers can lose out more than others because most of their money must be spent on food and rent, spending that typically cannot be delayed,” Rahman says.

How does your U.K. salary increase compare with the change in inflation?

Use this calculator to find out.

Sources and Further Reading: (External Link) inflation in the U.S. (External Link) (External Link)

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