How Does Inflation Impact You?
Over time, prices rise (inflation). When prices rise, you must pay more money to buy the same thing. With a persistent rise in prices, the value of your money is eroded (decline in your purchasing power). What I mean by this is that with every pound, dollar or euro pent you can buy less stuff.
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Since 1970, the price of a cup of coffee has risen by a staggering 530%. If you had $5 in 1970 you could buy 20 cups of coffee. In 2019, that same $5 would only just manage to get you 3 cups!
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Essentially the main take away is that any money you posses right now will not be able to buy you as much stuff in the future because prices will rise due to inflation.
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The average rise in consumer prices for the UK has been roughly 2.5% from 1989 to 2019. This is a similar case for developed nations around the world. It doesn’t matter whether its the cost of food, cars, clothes or houses, the prices of all these thing would have risen since you entered the world and will continue to rise throughout your lifetime.
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Source: Office for National Statistics (ONS)
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You might be thinking if the inflation rate has only risen on average by 2.5% a year, then why do I care? Over the course of a number of years however, the effects of inflation is significant.
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"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." - Ronald Reagan
If the cost of the average food shop 70 years ago was £100 and this rose in price by 2.5% every year, how much would it be worth today?
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This food shop would now be more than 5 times its initial price at £563.
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Summary
Inflation causes the value of money to decline over time. The problem is that over time the money you posses won’t be able to stretch as far in the future, when compared to the past. One way of protecting your wealth is to invest. Investing put simply is putting your money to work in order to achieve a return on it. For example, putting £1,000 into the stock market because you believe that over time this £1,000 will grow in value compared to just holding it as cash, which will definitely not grow.
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If you would like to know more about investing then click here.
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