On January 24, the National Institute of Statistics and Geography (INEGI) published the National Consumer Price Index (INPC) which reported that, at the end of the first half of January 2023, there was an increase of 0.46%. , which places annual headline inflation at 7.94%.
This is the highest inflation rate in our country since January 2001, when an inflation of 7.86% was reported for the same period; which at that time was in a downward spiral, contrary to what happens today, which has been increasing, although there was certainly a drop in the second half of November.
But, let’s understand what inflation is, to decide if it is good or bad. This is defined as the general increase in the prices of goods and services in an economy over a period of time. And as an economic theory, it is not very old, but there are writings that refer to it since the Renaissance. Basically, it is that when there are few things that can be sold (supply) and more people want to buy them (demand), the price of goods rises naturally. A little inflation is good for any economy. If there were not some inflation, there would be less consumption and with it, a drop in prices, but there would also be less money in circulation. Experts define that healthy inflation should be between 2% and 3% per year.
And how does that affect us? It seems like a basic topic, but we are going to exemplify it this way. We have the case of Roberto who has a monthly income of $15,000.00 pesos, and he sets the goal of saving 8% of his income, that is, $1,200.00 pesos, to buy a motorcycle that, in January 2022, cost $14,000.00. At the end of the year, Roberto will have saved the amount of $14,400.00 pesos. However, when he arrives at the store where he intends to buy it, he finds that the same model that he had quoted 12 months ago now costs $15,112.00, that is, he has to save one more month of his programmed savings, to be able to buy said asset. His money lost value within a month of his savings.
High inflation has the consequence that people lose purchasing power, since we can buy fewer things with the same money, generating some additional effects, such as the fact that it encourages a decrease in savings, since in the future money is worth less , instantaneous consumption is caused, which again, generates an increase in demand, with the consequent increase in prices. And the cycle can go on forever.
With sustained inflation of 7% per year, without people’s income rising in the same proportion, it would be the equivalent of losing 40% of purchasing power in 5 years, since the increase in prices is compounded and not cumulative. .
That is why it is important for everyone to know where we put our savings, and that they generate at least something more than inflation.
#Inflation #daily #life