What is inflation? Why is it affecting us so much?
Over the last few months, especially in Latin America, the inflation has been present in most people's minds. An item that you used to buy for 2 USD might now cost 2.8 USD, so it is a phenomenon that directly affects our pockets and our daily lives.
Do you know what inflation is? How does it affect us? Below, TruBit Finance will tell you all this information. In addition, we invite you to read to the end, as we will explain some tips that you can apply TODAY to take care of it.
What is inflation? The excessive phenomenon of rising prices
Inflation is an economic phenomenon that directly affects a country's economy. It is a disproportionate and disorderly increase in the prices of goods and services that are currently on the markets, this for a reasonably long period.
We can also explain it in the following way: it is the decrease in the value of our money, since we acquire fewer goods or services with the same amount of money we had months ago.
Inflation is an indicator that shows how the purchasing power of a currency decreases over time, which means a reduction in the actual value of the money used as a medium of exchange. Therefore, it is also a unit of measurement in an economy.
To assess the inflation increase, indexes represent the percentage increase in a weighted 'basket of goods.' An example of an index used to measure inflation is the Consumer Price Index (CPI).
Types of Inflation
Now that you understand inflation, it's essential to familiarize yourself with its types. According to economic theories, there are essentially three:
- Moderate Inflation: This occurs when prices rise gradually, at a rate of less than 10% per year.
- Galloping Inflation: In this scenario, prices surge significantly, sometimes even reaching 100%. Such a sharp increase can directly impact a country's economy.
- Hyperinflation: Though rare, hyperinflation is when the rate exceeds 1000%. It can lead to severe economic crises.
How is inflation calculated?
Each country has its own way of calculating inflation and the official and governmental agencies are in charge of launching the percentage increase that products will have during a period of time (usually a month). But, most countries use the basic rule of economics called CPI, whose formula is as follows:
[(final CPI - initial CPI) / initial CPI] x 100
The CPI or Consumer Price Index allows us to calculate the percentage increase that a product has had over the years. For example, in 2019, a liter of milk may cost 1 USD, and in 2023, the price will be 1.5 USD, then:
- [(1.5 - 1) / 1.5] x 100 = .50, i.e. 50%.
The CPI shows that a liter of milk has increased by 50% in value in 4 years, which is relatively high inflation.
What are the causes of inflation?
Inflation is an economic phenomenon resulting from various factors, detailed as follows:
- Demand: This is associated with demand exceeding supply, which can lead to a price rise. For instance, if 1 million bottles of soft drinks are produced, and 2 million people demand them, it's expected for the price to go up.
- Production Cost Increases: This is one of the primary causes of inflation in many countries. When production or labor costs increase for any reason, product prices typically rise to compensate for these hikes. For example, when gasoline prices soar, many goods and products see gradual price increases due to elevated transportation costs.
- Built-in or Anticipatory Inflation: This arises, expecting a significant price surge for a particular good or service. Its price is preemptively increased to mitigate and spread out the impact. Some countries adopt this approach to avert more severe economic downturns, particularly in the commodities sector.
- Inflation by Monetary Base: This arises when a country chooses to print more money. With an increased money supply in circulation, consumers tend to spend more. Consequently, the prices of most goods and services rise to match the heightened demand.
- Structural Inflation: This type of inflation is connected to structural economic challenges. Factors include the lack of competition in specific sectors, inefficient regulations, or rigidities in the labor market. These elements can hinder economic efficiency, leading to sustained inflationary pressures.
- Imported Inflation: Companies frequently import goods, which can be subject to exchange rate fluctuations or legislation variations based on trade policies. These factors can drive up costs, subsequently affecting domestic prices.
An Example of Inflation: The Fuel Situation in Latin America
Looking for a tangible example of inflation? The rising cost of fuel, frequently observed in Latin America, stands out. In countries like Mexico, the price of fuel can climb by 5 to 10 percent annually (per liter), leading to more expensive goods.
The increase in fuel prices causes product prices to rise for two primary reasons:
- Transporting raw materials to factories necessitates fuel, leading to increased transportation costs.
- Delivering the finished product to its point of sale also requires fuel, thus elevating the transport cost.
Companies must contend with two separate hikes in transportation costs. As a result, product prices often rise to sustain company operations, leading to inflation or a gradual uptick in the cost of the final product.
How does inflation affect people? Main consequences
Besides being an essential element in measuring the health of a country's economy, people are the ones who are directly affected by this economic phenomenon. To make it easier, we leave you with the main consequences of inflation:
❌ People's Purchasing Power Goes Down: People have less purchasing power because the prices of goods and services increase. That you say that every day is enough for less, is partly the inflation problem.
❌ Rising Wages: It may seem like an advantage for people, but for companies, not so much. Companies usually support workers so that salary is not an economic problem, but many companies do not have that luxury.
❌ Debt Readjustment: Both companies and individuals acquire debts as time goes by, but the problem with inflation is that there may be a readjustment. For example, if your debt is in foreign currencies such as the dollar or euro, the exchange rate can cause it to depreciate or even increase.
❌ Reduction in Investments: Countries often face this central problem. Inflation is an economic indicator showing fragility and weakness (in addition to the previous points), which is why it is the main reason investments (especially foreign investments) do not arrive or are made with greater caution.
How can we protect ourselves from inflation?
Do we have a defense against inflation? Yes, users can have an action plan to protect themselves from inflation. One of the main steps to have a protective barrier is to diversify your investments or savings, to avoid being tied to a currency that can lose value at certain times.
In the 1990s and the first decade of the 2000s, people lived through very severe economic crises, which caused the inflation phenomenon to spread worldwide. Many diversified their investments in assets such as real estate, bonds, corporate stocks, and gold.
Although this does not mean that you are one hundred percent safe from this phenomenon (remember, prices increase in your country, and therefore, you also suffer when buying goods and services), the total impact will be reduced in your portfolio, something that reduces the economic risks by not concentrating all your savings and investments in a single asset.
In the second decade of the 2000s, people are still looking for options to diversify their investments. This is where cryptocurrencies come in, digital assets with a specific value and their own market, ideal for investing 24 hours a day, 365 days a week, all from home.
Buying cryptocurrencies has become an excellent ally for investment in times when inflation affects countries. For example, in 2023, the purchase of Bitcoin in Argentina increased by 147% after the political context caused inflation in this country to increase disproportionately.
Why do cryptocurrencies help protect us from inflation? They are currencies with their own market and price so that anyone can diversify their portfolio. Plus, they offer a decentralized system that does not suffer from traditional banking limitations.
Cryptocurrencies allow access to assets other than traditional ones. Because, in most cases, cryptocurrencies have a value according to supply and demand, these instruments often will enable you to have profits in the face of excessive inflation, especially if your investment was made some time ago, because the historical performance of cryptocurrencies has been on the rise.
There are also the stablecoins options. These cryptocurrencies have a stable value linked to a fiat currency. Although their value can also be affected by inflation (For example, NARS, linked to the Argentine peso, has had fluctuations since 2023), users can acquire crypto related to stronger currencies, as in the case of USDD, USDC or USDP, which have the value of a US dollar.
For emerging economies such as Mexico or Chile, acquiring Stablecoins can prove to be an excellent opportunity to combat domestic inflation. For that reason, more and more professionals prefer to receive payments in digital currencies, especially those who receive fees.
The only thing left is to choose an ideal platform for you to buy cryptocurrencies and have a shield against inflation. This is where TruBit comes in, a platform that operates in Latin America and that can support you in your entire process to protect you from inflation.
In addition, TruBit has tools to make your portfolio increase little by little, such as Earn+ (the best way to earn interest on cryptocurrencies), perpetual contracts (to earn no matter if the currency goes up or down in price), and traditional cryptocurrency trading.
Inflation is an economic phenomenon that causes prices to increase disproportionately due to different factors, such as the weakness of a currency or the increase in the price of raw materials. This directly affects people, because, with the same money, you can afford fewer goods and services.
Fortunately, some tools allow us to protect ourselves from it, such as diversifying our savings using tangible and non-tangible goods. For example, there are cryptocurrencies, which, being totally decentralized, do not follow traditional banking rules, so they often protect us from the effects of inflation.
But remember that cryptocurrencies do not have a very stable value and can fall according to market situations, so we recommend you invest the money you are willing to lose, which does not affect your economy.
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