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How to define inflation and survive it



Inflation, contrary to popular beliefs, does not mean things get more expensive. Inflation does not mean price rise, price rise happens due to inflation. So what is it?

If you search the web you get confusing definitions of inflation. So at HowToPlaza we did some detailed study on the subject to understand, and help you understand better, what inflation actually is. When inflation happens, the purchasing power of your currency drops. Something that you could buy with 1 dollar last year, you can buy it in 2 dollars this year. It doesn’t mean the thing has gotten more valuable, it’s just that purchasing power of your dollar has fallen. This may happen due to

  • The government publishing more currency due to some financial mishandling or some other crisis — since the tangible goods in the country must be equal to the currency in the country, inflation occurs.
  • Rising cost of production. As it becomes more expensive to produce goods and services, goods and service producers need to charge more from the end consumers.
  • Artificial or natural scarcity. Scarcity of foods and other services are sometimes manmade (to earn more profits) and sometimes natural such as floods, draughts and cyclones.

Basically, inflation means the prices inflate without an increase in the overall value of commodities.

How to survive inflation

In order to survive inflation you must know what’s the rate of inflation in your country. Some degree of inflation is natural, but you should also take into account some extraordinary circumstances too. You’ll need to find the inflation calculator specific to your country. It’ll tell you if A costs $x in 2010, what will it cost in 2012. If you cannot find an inflation calculator specific to your country, you can use an Excel spread sheet or an OpenOffice spreadsheet to know how much A will cost in 2015 if it costs 100 in 2010. The image below assumes that the inflation rate is 5%.

Inflation rate calculator

It’s very easy to prepare this table:

  • In column A, after the header, enter the years from the current year to as many years as you feel like.
  • In column B, enter 100 after the header.
  • In column C, enter the inflation rate (divide n by 100 and write that instead of n%).
  • In column B, below 100, enter this formula: =B2*(1+$C$2)
  • Copy the contents of this cell a and copy them below in all the remaining cells.

You get the respective amounts for all the years. The good thing about this formula is that when you change the inflation rate in cell C2 or the initial amount in B2, all the calculations are changed immediately.

You can use this table to know how much money you have right now, and how much you’re going to need to maintain the same standard of living.