Recently, we hear a lot about inflation and all the more so in the world of crypto currencies, where we seem to be trying to fight it.
Inflation is defined by a loss of purchasing power, more particularly the purchasing power of a currency: a unit of the same currency makes it possible to buy fewer and fewer goods and services.
In a simple way, inflation is expressed by a general increase in prices over a given period. It is therefore evaluated in the form of a rate.
But in reality, it’s more complicated than that.
Inflation is calculated through the variation in the prices of many goods and services, taking care to attribute greater importance to some. The average cost of living of a consumer is measured by the administrations through a household survey. This survey makes it possible to bring out a “basket of current items” whose cost evolution over time will be studied.
A term present when we talk about inflation is the consumer price index : CPI (calculated in France by INSEE).
This index corresponds to the cost of the basket in relation to a defined reference year. With a CPI of 100 over the reference year and a current CPI of 105, observed inflation is 5% over the period between the 2 calculations.
Is the rate of inflation relative to prices?
Inflation aims to determine the change in the purchasing power or “real income” of households, but the distribution of the basket of items cannot correspond to the whole population in the same way.
Although the weight of common items in the basket is often modified by INSEE, inequalities prevent the establishment of a truly representative basket.
In 2021, for example, the weight of food and housing in the consumption basket is established at 15.8% and 15.3% respectively by INSEE. For a large part of households in France, the cost of rent nevertheless represents much more than 20% of expenses.
Where does inflation come from and why is its rate rising?
It is obviously not to find the reason behind the inflation and the latter can be the consequence of several effects:
- When supply fails to keep up with demand for a prolonged period, the logical rise in prices can be considered inflation.
- When production costs increase, a repercussion can be observed until it reaches household income. Companies increase the prices of the goods produced, and households change their behavior by anticipating a future price increase
- When the increase in the money supply is too great, inflation is generated. The quantity of a currency in circulation increases too quickly: each unit of this currency therefore loses its value more or less quickly
Since low-dose inflation is generally considered to be beneficial, the European Central Bank , whose mandate is to prevent prices from falling, aims for an inflation rate of 2%.
Many economists and investors tend to consider that the announced inflation rates are wrong and that the actual inflation rates are much higher, greatly reducing the value of the currency.
What is the impact of the inflation rate on my consumption?
To calculate the impact of inflation on your purchasing power, the variance of your income must be taken into account. On the other hand, if you want to calculate the impact of inflation on your savings, there are tools like this one , which we offer thanks to StackinSat , whose role is to help you fight inflation through a strategy in DCA on Bitcoin.