What is inflation?

Inflation is the increase in the cost of services and goods in an economy over a fixed period. Inflation is also described as the reduction of purchasing power.

Several conditions define price inflation; for example, the rise in prices has to be supported and not just an irregular event. During inflation, the increase in prices continues without stabilizing. So-called relative price changes often occur due to a mismatch in the supply & demand of a particular good or service as soon as the supply & demand balance out, the price stabilizes again.

Besides, inflation involves a significant increase in the costs of services and goods. On the other side, “relative-price change” usually means just a few products have increased in price, inflation refers to an increase in costs of almost all items in the market.

Inflation can be caused due to a quick increase in supply. For example, when European conquistadors conquered the western earth in the 15th century, silver and gold overflowed Europe and created inflation.

Pros of inflation

Inflation is often very risky, but it can also have some advantages. First, inflation can stimulate an economy. As more funds circulate, there are more funds to use, which creates higher demands. This triggers production, reduces unemployment, and puts more funds into the economy.

Inflation protects against a so-called danger, the: “Paradox of Thrift”. It refers to the motivation of consumers to delay buying goods when prices are decreasing during deflation. As you can see, inflation works the opposite way of deflation. It helps consumers to purchase products and services quickly before prices rise more.

Cons of inflation

It harms the most vulnerable people in the economy, the poor and the elderly. It also reduces the spendable income of the average working class.

Finally, inflation reduces the true worth of savings. People who have saved money for years (for example, for studies or retirement) will see the buying power of that money reducing.

Cryptocurrencies and inflation

Bitcoin is seen by many as a good hedge against the ravages of inflation due to the fixed total supply of 21 million. Despite some disagreements, many believe that this makes Bitcoin a deflationary currency and, therefore, resistant to inflation. Due to this fact, many Venezuelans have started using Bitcoin or other cryptocurrencies.