How Inflation impacts purchasing power

A steady rise in the overall prices of goods and services you consume in an economy is called inflation.

What is inflation?

When price increases, the money in your pocket is not enough to purchase the same item as before. That means, you need to pay extra to buy the same things. For example, last year one basket of tomatoes could get you two bags of rice. This year, with a 2% increase in tomato prices, the same basket gets you only one bag of rice.

Inflation is pushing up the cost of everyday goods and services, and main cause of inflation is an imbalance between demand and supply. For this reason, its impact on purchasing power of consumers is becoming more visible. Consumers are paying higher bills for food, fuel, transport and housing every year, even if their income does not increase at the same pace which directly lowers the value of money. When incomes don’t rise at the same pace, it affects the household budget, and people usually adjust their budget by buying fewer non-essential items, choosing cheaper brands with lower prices, or cutting unnecessary expenses.

Even companies, instead of increasing price of a product, strategically reduce the quantity of product to maintain the same price. Sometimes, companies raise prices due to inflation because their own costs like wages, fuel or raw materials have gone up. This condition is known as cost-push inflation. For consumers, inflation means everyday life becomes more expensive.

Causes of Inflation

The main cause of inflation is an imbalance between demand and supply. When demand for goods and services grows faster than production, the prices of commodities rise causing shortages in essential commodities. Additionally, excess money supply in the economy can increase overall spending, leading to higher prices and increased government spending can also push inflation higher.

Link Between Leadership Decisions and Rising Prices

Geopolitical tensions in the world often push inflation higher. Higher global crude oil prices, disruption in the supply chain, and increases in energy and commodity prices create uncertainty that filters into business costs.

When a situation like war between countries escalates or diplomatic relations weaken, firms face higher transport risks because it increases the cost of moving goods from producers to consumers. Everything depends on long-distance delivery, which sometimes causes delays, high chances of damage to goods, and piracy, so shipping companies charge more to cover insurance, fuel, and other expenses, which the consumer pays through heavy taxes on high-priced goods, pushing overall inflation up and reducing purchasing power. In such situations, leaders’ decisions, whether sanctions, tariffs, or trade restrictions, influence the government’s inflation rate.

As uncertainty grows in the world, households and firms expect higher future prices, and the prices of gold and other precious metals start to rise, which reinforces inflation through wage demands and precautionary pricing.

Why Prices Go Up After New Policies

Prices often go up after new policies because a new policy impacts the cost structure for businesses, which further affects the cycle of supply and demand in the economy. Consumers pay taxes, and when there is a change in taxes, the companies have to face higher expenses, and to protect their profit, the cost of these expenses is put on consumers, which causes a price rise of goods and services across the economy.