What is inflation?

Inflation is an economic concept. It refers to the rising prices of goods, commodities, and services in a particular economy. Inflation aims to measure the overall impact of price changes for a diversified set of products and services. It allows for a single value representation of the increase in the price level of goods and services in an economy over a period of time. 

What is purchasing power?

Purchasing power parity (PPP) is a popular macroeconomic analysis metric used to compare economic productivity and standards of living between countries. Purchasing power parity is the exchange rate at which the currency of one nation must be converted into the currency of another so that the same products and services can be purchased in each country. 

The impact of inflation on your savings and investment

Reduced Real Value of Money: Inflation diminishes the real value of money. Even if the nominal amount of money remains the same, its purchasing power decreases. This means that the same amount of money will buy fewer goods and services.

Impact on Savings: Inflation can erode the value of savings. If the interest rates on savings do not keep pace with inflation, the real value of money saved decreases. This is particularly relevant for fixed-interest savings accounts.

Effect on Interest Rates: Central banks often use interest rates to control inflation. If inflation is high, central banks may raise interest rates to cool down spending and reduce inflationary pressures. Higher interest rates can affect borrowing costs and consumer spending.

In summary, inflation erodes purchasing power by diminishing the real value of money, making it crucial for individuals, businesses, and policymakers to consider its effects and implement strategies to mitigate its impact.