Every country faces the harsh realities of inflation in its economy and populace. Each year inflation affects the purchasing power of money. It devalues a currency causing it to purchase little or very little of goods and services depending on how high it is per year within a country’s economy.
Savings are affected and people aren’t aware of this. They feel they still have their money plus interest as they save. But it is not the amount of money but what it can buy as at when they need it.
The purchasing power of money is the purchasing strength of a currency. That is how much of a service or good one unit of a currency can buy at a particular point in time.
Economists and financial experts measure this. They sometimes work for companies that teach and encourage people to save rather than keeping their money in saving accounts that yield little or no interest and falling victim to inflation. When people invest with these companies, they are assured of more profit than a savings account, and their money is kept safe.
In what ways does inflation affect the purchasing power of money?
1. Reduces the Strength of the Currency
The power of ten dollars five years ago is not the same right now. What ten dollars could buy in 2016 is not what it will buy today. No thanks to inflation. It makes people buy less with more money.
So the more money you have doesn’t shield you from the effects of inflation. You can only search for more avenues to make more money to cushion the effects of inflation.
2. People Spend More
As money loses value, people will spend more not as a waste but to get done with purchasing what they need and move on with their lives. They want to let go of the money in their hands.
Money has lost its value and having more money doesn’t make you richer. People will buy more of what they need and won’t lose value. Mostly, these will be consumables like groceries, fuel for cars, and the likes.
3. Inflation Leads to More Inflation
As people spend what money they have in the bid to reduce how long they carry around or save a currency that is devalued, there will be a large pool of money sloshing through the economy which no one wants. They would rather spend it than save it. This amount in the economy causes more inflation.
4. Increase in Borrowing
Because people understand that the currency is worthless, unable to buy more or even quality, they will look for who to borrow money apart from to use it to buy goods. When the inflation rate drops, their money will have more purchasing power, enabling them to get more with little money.
How much money you have depends on the level of inflation as to when you have the money and what that money can buy in the market.