Why do only scarce goods attract the price?

Inflation explained in simple terms: definition & impact on consumers

When it comes to the development of prices, the term "inflation" is used again and again. But what exactly is it? And what does it mean for consumers when inflation rises?

Price fluctuations are not unusual. However, if the prices for goods and services continue to rise, one speaks of a inflation, also Inflation called.

What is meant by this is that the value of money is decreasing. So you get less for your money than before. In other words: the purchasing power of a single euro is decreasing.

But how exactly does inflation work? When does it become dangerous? And who does inflation hit particularly hard? t-online answers the most important questions.

What is inflation exactly?

The term inflation denotes a persistent one Increase in the price level. In short, inflation occurs when the prices of a large number of goods, products and services rise and do not fall again.

If that happens, the purchasing power of money will decrease. So one euro is worth less. For this reason, one speaks of inflation as well Currency depreciation.

You can feel inflation in your wallet relatively quickly. That is when you have to spend more on goods and services than you used to. The term inflation comes from the Latin "inflare" and means something like to inflate. While many people in Germany in particular are afraid of high inflation, a slight increase in inflation is actually quite desirable from an economic point of view (see below).

Reichsbanknote of the Weimar Republic: During the hyperinflation from 1914 to 1923, the German currency rapidly lost value. (Source: Max Köhler / Getty Images)

Hyperinflation
Hyperinflation occurs when the inflation rate climbs to more than 50 percent per month. The devaluation of money becomes more or less uncontrollable. In Germany this was the case after the First World War: the money lost value so quickly that you had to spend it immediately to get anything in return. At the height of inflation, bread cost 200 billion Reichsmarks. In 1923, the hyperinflation was stopped by the introduction of the new currency Rentenmark.

How does inflation arise?

In practice, inflation occurs when consumer prices rise. A distinction is made between one Supply and demand inflation.

  • Supply Inflation: Companies can force inflation by raising their prices. For example, to increase your profit or to pass on increased costs - for example for energy or wages - to consumers.
  • Demand Inflation: It is also possible that consumers want to buy so many products and services that there is not enough on offer. In this case, demand drives inflation as manufacturers and suppliers can charge more money for their scarce goods. In this case, wages often rise along with prices, so that a self-reinforcing wage-price spiral is set in motion. That can fuel inflation even further.

Central banks want to steer inflation

In theory, however, inflation has mainly to do with the Money supply to do. The idea: the more money there is, the less it is worth - and the higher the prices. So if the money supply increases, so does the price level.

Central banks and central banks have control over the money supply. In the case of the eurozone, that's that European Central Bank (ECB). It can use various mechanisms to ensure that the money supply increases or decreases.

The ECB is thus the top guardian of inflation. Your job is the so-called Monetary stability. The aim of the ECB is therefore to keep the value of money stable over the long term while at the same time enabling economic growth. The ECB is aiming for an annual inflation rate of just under two percent.

If inflation rises above this level permanently, it would be detrimental to the economies of the EU. Because consumers would lose confidence in the currency, in this case the euro.

Deflation is more dangerous than inflation

Conversely, inflation that is too low also harbors a great danger: the one deflation.

Deflation is the opposite of inflation: prices fall permanently. What sounds good at first can make businesses and consumers postpone investing and spending.

This in turn affects other companies that can no longer sell - and therefore may even lay off employees. If people lose their jobs in deflation, they buy even less because they have to save. Economists consider this downward spiral to be even more dangerous for an economy than inflation.

How is the inflation rate determined?

In order to determine the inflation rate, statisticians use a so-called as a guide Price index. For an imaginary shopping basket, this indicates how the prices of the goods and services in the basket have changed over time. The basket includes the prices for butter, heating oil or television.

The most famous in the euro area is the so-called Harmonized index of consumer prices (HICP). The ECB refers to this in its calculations (see above).

The inflation rate is calculated from the price of the entire shopping cart in one month compared to the price of the same shopping cart in the month of the previous year. The rate of inflation describes the percentage change in the cost of living within a year.

When determining the inflation rate, the weighting of the goods plays an important role. The prices of products for which more money is spent on average - such as electricity - are given greater importance than, for example, products for which less money is spent.

Who is inflation particularly hard on?

Low wage earnerswho have to spend a large part of their income on food and energy such as electricity, heating oil or fuel, often feel the inflation particularly clearly. Because energy prices are often the drivers of inflation.

Losers from inflation also include Unemployed, Welfare recipients and pensionerwhose services the state cannot increase quickly enough to compensate for the increased prices.

Regardless of income, you can also saversuffer from inflation: you lose part of your wealth if the interest on your savings account is below the inflation rate.

Can I Escape Inflation?

That's fine. In addition, the interest rates for your investments such as overnight or fixed-term accounts should be above the inflation rate. However, interest rates are currently very low.

Instead, you can bet on an investment on the stock exchange - for example with stocks or funds. The income here is often significantly higher than with traditional investments such as the savings book.

With a share you also become a co-owner of a company. In addition, many companies let their shareholders participate in their profits, i.e. distribute so-called dividends.

Gold or real estate are also considered inflation-proof investments. But be careful: Such an investment is usually very expensive for small investors.

Who will benefit from inflation?

Inflation is especially beneficial to debtors. Consumers, companies or even the state can more easily excuse themselves.

Because: If the price level rises, debts lose relatively in value. Debtors can stock up on money faster, while the real value of the loan decreases and can be repaid more quickly.

To compensate for inflation, however, incomes must also rise so that consumers really feel the devaluation of their debts.

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