Inflation; Causes and effects ,

Inflation is the long term rise in the prices of goods and services caused by the devaluation of currency.
Inflationary problems arise when we experience unexpected inflation which is not adequately matched by a rise in people’s incomes. If incomes do not increase along with the prices of goods, everyone’s purchasing power has been effectively reduced, which can in turn lead to a slowing or stagnant economy.

what exactly causes inflation in an economy? 

Inflation is primarily caused by an increase in the money supply that outpaces economic growth.

Ever since industrialized nations moved away from the gold standard during the past century, the value of money is determined by the amount of currency that is in circulation and the public’s perception of the value of that money. When the Federal Reserve decides to put more money into circulation at a rate higher than the economy’s growth rate, the value of money can fall because of the changing public perception of the value of the underlying currency. As a result, this devaluation will force prices to rise due to the fact that each unit of currency is now worth less.

One way of looking at the money supply effect on inflation is the same way collectors value items. The rarer a specific item is, the more valuable it must be. The same logic works for currency; the less currency there is in the money supply, the more valuable that currency will be. When a government decides to print new currency, they essentially water down the value of the money already in circulation. A more macroeconomic way of looking at the negative effects of an increased money supply is that there will be more dollars chasing the same amount of goods in an economy, which will inevitably lead to increased demand and therefore higher prices.

National Debt he reason for this is that as a country’s debt increases, the government has two options: they can either raise taxes or print more money to pay off the debt.

A rise in taxes will cause businesses to react by raising their prices to offset the increased corporate tax rate. Alternatively, should the government choose the latter option, printing more money will lead directly to an increase in the money supply, which will in turn lead to the devaluation of the currency and increased prices (as discussed above)

The demand-pull effect states that as wages increase within an economic system (often the case in a growing economy with low unemployment), people will have more money to spend on consumer goods. This increase in liquidity and demand for consumer goods results in an increase in demand for products. As a result of the increased demand, companies will raise prices to the level the consumer will bear in order to balance supply and demand.

Another factor in driving up prices of consumer goods and services is explained by an economic theory known as the cost-push effect. Essentially, this theory states that when companies are faced with increased input costs like raw goods and materials or wages, they will preserve their profitability by passing this increased cost of production onto the consumer in the form of higher prices.

Inflation can be made worse by our increasing exposure to foreign marketplaces. In America, we function on a basis of the value of the dollar. On a day-to-day basis, we as consumers may not care what the exchange rates between our foreign trade partners are, but in an increasingly global economy, exchange rates are one of the most important factors in determining our rate of inflation.

This exchange rate differential between our economy and that of our trade partners can stimulate the sales and profitability of American corporations by increasing their profitability and competitiveness in overseas markets. But it also has the simultaneous effect of making imported goods 

A healthy rate of inflation is considered a positive because it results in increasing wages and corporate profitability and keeps capital flowing in a presumably growing economy. As long as things are moving in relative unison, inflation will not be detrimental.

Another way of looking at small amounts of inflation is that it encourages consumption. For example, if you wanted to buy a specific item, and knew that the price of it would rise by 2-3% in a year, you would be encouraged to buy it now. 

1. Spend money on long-term investments.
We all love to save. But when it comes to long-term investments, sometimes spending money now can allow you to benefit from inflation down the road. 

2. Invest in commodities.
Commodities, like oil, have an inherent worth that is resilient to inflation. Unlike money, commodities will always remain in demand and can act as an excellent hedge against inflation. 

3. Invest in gold and precious metals.
Gold, silver, and other precious metals, like commodities, have an inherent value that allows them to remain immune to inflation. In fact, gold used to be the preferred form of currency before the move to paper currency took place. With that said, even precious metals are liable to being a part of speculative bubbles.

4. Invest in real estate.
Real estate has also historically offered an inflationary hedge. The old saying goes: “land is the one thing they aren’t making any more of.” Investing in real estate provides a real asset. In addition,rental property can offer the landlord the option of increasing rent prices over time to keep pace with inflation. Plus, there’s the added alternative of the ability to sell the real assets in the open market for what normally amounts to a return that generally keeps pace with or outstrips inflation. However, just like with precious metals, we all know that real estate bubbles can and do exist.

5. Consider TIPS.
Treasury Inflation Protected Securities (TIPS) are guaranteed to return your original investment along with whatever inflation was during the lifetime of the TIPS. But TIPS do not offer the opportunity for significant capital appreciation, and therefore should only make up a portion of your personal investment portfolio allocation.

7. Consider dividend-paying stocks.
Exhaustive research by Wharton School of Business economist Jeremy Siegel reveals that large cap, dividend paying stocks have provided an inflation-adjusted 7% per year return in every period greater than 20 years since 1800. If you have the investment risk tolerance for the volatility and a time horizon of greater than 20 years until retirement, consider dividend-paying securities. Dividend stocks offer a hedge against inflation because dividends normally increase on an annual basis at a rate which outpaces that of inflation. This almost guarantees stock price appreciation at a similar pace, while offering the further benefit of compounding when dividends are reinvested.

8. Save More.
The fact is that you are probably going to need a lot more money for retirement than you think you will. There are two ways to get to your new benchmark: Save more, or invest more aggressively. Saving more is probably the easiest and most proactive thing you can do to ensure your ability to fund a comfortable retirement.

Like it or not, inflation is real. Ignoring the effects that inflation can and will have on your long-term savings is probably one of the biggest mistakes that many investors make. Understanding the detrimental causes and effects of inflation is the first step to making long-term decisions to mitigate the risks. But the next step is taking action. Consider the ten tips above to help you overcome the devastating effects inflation can have on your future retirement.