Hey there my friend!
Have you ever wondered why things get more expensive as time goes on? Of course you do. I'm pretty sure you had the moments in the market where you find the same item for more expensive prices even in the same week.
Well, it's because of a sneaky monster called inflation. As one of your friend, I'm here to help you understand inflation in the simplest way possible. So, let's dive in and unravel the mystery together!
Money can't buy happiness, but it improves your bargaining position. -Ayberk Yavuz
What is Inflation?
Inflation is when stuff starts to cost more and our money -buying power- doesn't go as far. It's like a trickster that makes the prices of things we want go up. You know that feeling when you saved up for a toy, but when you finally have enough money, it's not enough anymore because the price went up? That's inflation playing its game!
Why Does Inflation Happen?
There are a few reasons why prices go up. One reason is when there's too much money going around. Imagine if suddenly everyone had more money, but there weren't enough things to buy. That would make people compete for the same stuff, and that pushes prices higher. Sneaky, right? Let me detail it more for you. Keep reading it.
Supply and demand: Imagine you have a limited supply of your favorite snacks, let's say chocolate bars. Now, imagine that suddenly everyone in your school wants those chocolate bars because they're so delicious. As the demand for chocolate bars increases, there's not enough supply to meet everyone's cravings. So what happens? The price of chocolate bars goes up! That's because when things are in high demand but short supply, sellers can charge more for them, and that's one way inflation happens.
Printing too much money: Imagine if your parents gave you a dollar for every minute you played your favorite video game. At first, it might seem amazing because you're getting a lot of money. But then, what if everyone in your school started getting the same deal? Suddenly, there's a lot more money floating around because everyone is getting more. When there's too much money in an economy, people start bidding up the prices of things like toys, clothes, and snacks. That's inflation caused by printing too much money.
Higher production costs: Imagine you and your friends have a lemonade stand. You used to buy lemons for 50 cents each, but one day, the price goes up to 75 cents. Now, you have to spend more money on lemons, so you raise the price of your lemonade to cover the cost. This happens on a larger scale in the economy too. When the cost of things like raw materials, labor, or transportation increases, businesses have to charge more for their products or services to make a profit. These increased production costs can lead to inflation.
I think we are already professionals by now. But still we have things to talk. Stay with me.
How Inflation Affects Us:
Inflation affects us by making our money weaker. It means we can't buy as much with the same amount of money. You know how you used to get a whole bag of chips for a dollar, but now you only get half a bag? That's inflation at work. It can make it harder to buy the things we want, so we need to know how to deal with it.
Taking on Inflation:
Thankfully, there are people who keep an eye on inflation. They're like superheroes! or , are they?
Governments and banks have special powers to control inflation. They use things like interest rates to help keep prices from going too high. They can make it easier or harder for us to borrow money, which affects how much we spend.
When you put your money in a bank or invest it, they offer you something called an interest rate. It's like a reward for letting them use your money. They promise to give you a little extra money on top of what you saved.
Now, why does this help protect you from inflation?
Well, when the interest rate is higher than the inflation rate, it's like your money is growing faster than the sneaky monster can make things more expensive. Let's say the interest rate is 5% and inflation is only 2%. Your 100 € will grow to 105 €, while the things you want to buy only become 2% more expensive. So you can still buy the same stuff with your 105 €, even though prices went up a little.
Think of it as your piggy bank growing muscles to fight off the monster of inflation. The higher the interest rate, the stronger your piggy bank becomes! It helps your money keep up with or even outpace the rising prices in the world.
Now, keep in mind that interest rates can change over time. Sometimes they go up, and sometimes they go down. So it's important to keep an eye on them and make smart decisions about where to put your money to get the best protection from inflation.
Remember, your money can be a superhero when it's armed with the power of interest rates or investments! Otherwise the money in the bank waiting without any move is the most dangerous money type you can have , day by day you will lose value.
Protecting Your Money:
While we can't stop inflation, we can be smart with our money. One way is to be an investing champ!
By putting our money into things that can grow faster than inflation monster, like stocks or even starting a small business, we can make sure our money stays strong and keeps up with rising prices.
Being Money Savvy:
Inflation might be sneaky, but with knowledge, we can be money heroes! By understanding how inflation works and making wise choices with our money, we can beat inflation at its own game. So, let's become smart money-savers and show inflation who's boss!
In my future blog posts I will be talking about these investment models. Until then take care of yourself.
The economy is the start and end of everything. You can't have successful education reform or any other reform if you don't have a strong economy. -David Cameron
Thank you for your time and attention for the topic, see you at the next ones!
Ayberk Yavuz, June 2023