Inflation is good and bad. Read on to find out why.
Have you heard of inflation? Not like putting air into a ball or pool toy, but monetary inflation. You might have heard it mentioned on the news when your parents are watching. Or maybe you heard people talking about how their money just doesn’t seem to go as far these days. So you do know a little bit about inflation—at least that it exists. But what causes it and what can you do about it?
What is inflation?
Inflation is prices going up. A lot of things can drive up the costs of goods and services.
Inflation stands apart because it’s not just that the price of goods is going up, it’s that the purchasing power of your money is reduced (less than it used to be).
Inflation can be good and bad, often at the same time. For example, inflation is bad for the cash you have in your wallet. But inflation is good if you own a house or stocks because inflation generally drives up the price of those.
What causes inflation?
There are a few things that cause inflation. Commonly, though, it is because of an increase of money into the economy. If there is more money, people will find a way to get some of it by increasing the cost of goods they are selling.
There are two basic forms of inflation:
What can you do about inflation?
One way is to invest. As mentioned before, inflation is good for investments like real estate or stocks. Owning real estate might not be possible for you right now, but you can own stocks. If your parents are ok with it, move some money out of a savings account and into a long-term investment.
When it all goes wrong
There have been a few times in history when inflation has caused huge problems. One of these was in post–World War I Germany when their money was so devalued, it made more sense for people to just burn it to keep warm. Another example is Zimbabwe, where inflation was so bad they started calling it hyperinflation.
The inflation was so bad, nearly 80 billion percent, Zimbabwe gave up on their own currency and switched to U.S. dollars.
How’d this happen? A huge part of it was the government of Zimbabwe was in massive debt. On top of that was a decline in the economy as a whole. So Zimbabwe owed a lot of money, while making no money, and then decided to print a lot of money, a classic recipe for inflation.
In the end, inflation isn’t a good or bad thing. There’s no avoiding it, and it can be beneficial depending on where your money is invested.