Future purchasing power of $0,00 after 0.0252 months due to 2% inflation rate
Initial value: | $0,00 |
Inflation rate: | 2% |
Time period: | 0.0252 months |
Lost purchasing power: | $0,00 |
Final value in today's money: | $0,00 |
Due to 2% inflation rate over 0.0252 months the purchasing power of $0,00 will drop to $0,00 in today's money.
What will happen next?
Future value of
$0,00 due to 2% inflation will lose value as follows:
Lost value | Future purchasing power | |
---|---|---|
0 months | $0,00 | $0,00 |
What if inflation will be higher?
Future value of
$0,00 after 0 months will lose value as follows:
-
2.5% inflation will decrease future value to $0,00.
-
3% inflation will decrease future value to $0,00.
-
3.5% inflation will decrease future value to $0,00.
-
4% inflation will decrease future value to $0,00.
Lost value | Future purchasing power | |
---|---|---|
2% | $0,00 | $0,00 |
2.5% | $0,00 | $0,00 |
3% | $0,00 | $0,00 |
3.5% | $0,00 | $0,00 |
4% | $0,00 | $0,00 |
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What is inflation?
Inflation is a process of the decline of purchasing power of money over time. It is manifested by an increase in the prices of goods and services. Inflation is expressed as a percentage increase of the average price level of a fixed basket of services and goods.
The most common cause is an increase in the money supply and its rapid pace of circulation in the economy.
Inflation makes keeping the cash unprofitable and forces people to make different kinds of investments.
How can our website help you?
The inflation calculator is an online tool that allows you to determine the future purchasing value of your assets according to the indicated inflation rate.
Using this tool you can:
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determine the future value of your savings after a certain period of time;
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calculate the future value of debt to determine whether borrowing an amount of money at a given interest rate is profitable;
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calculate the real return on investment to check if investing money will allow you to make a profit.
Types of inflation
The main breakdown of inflation types is based on the rate of price increases in the economy, as it can reach different levels depending on circumstances. The dominant point of view among economists is that the most favorable type of inflation is slow growth of prices which encourages people and companies to invest rather than accumulate cash.
- creeping - a type characterized by the occurrence of slight changes in prices, which range from 0 to 3% per year. Crawling inflation makes it possible for the monetary authority to control the price rise.
- walking - characterized by a price increase of 3 to 10% per year. As a result, decisions are made that lead to an inadvertent additional fueling of inflation. Increases, among others, pressure to increase payouts. The central bank has difficulty controlling the current level of inflation.
- galloping - galloping inflation is said to take place in a situation where its level exceeds 10% annually. This situation poses a serious threat to the economy. The central bank loses control, the purchasing power of money decreases and economic growth slows down over the long term.
- hyperinflation - prices begin to increase by over 100% annually and changes are rapid. As a consequence, the financial system collapses and society begins to panic. Deposits are massively withdrawn and the collected funds are exchanged for foreign currency.
Deflation
There is one more type - deflation. This is the opposite of inflation and it is characterized by an increase of purchasing power of money.
Deflation causes noticeable drops in the level of prices on the market. As a result, if this phenomenon is maintained for a long time, it leads to stagnation in the economy.
While lowering prices in the market may be a desirable situation for consumers, it is safe to avoid falling prices, because it discourages investment and impacts long term growth prospects of the economy.
The causes of inflation
By tracking past events related to the increases in inflation, several situations can be distinguished that have a profound impact on this indicator. As a result we can list the following causes of decreasing purchasing power of a currency:
- an increase in the money supply, which is a consequence of additional issuance by the central bank, as well as money creation by commercial banks;
- unpredictable and rapid increases in production costs, caused e.g. by higher prices of raw materials, which result in limited supply;
- an increase in the level of aggregate demand in the economy;
- an imbalance in the budget, i.e. the state plans to spend more than to obtain;
- making too much investment in the economy;
- the state's economy is based on a flawed structure;
- an increase in the prices of imported goods to a given country, which increases production costs.
Inflation and interest rates
Central banks are institutions responsible for monitoring the level of inflation and preventing it from exceeding certain levels. Each country or monetary union has its own body responsible for ensuring healthy levels of inflation. In the United States this duty is held by the Federal Reserve (FED), while in the Euro Zone by the European Central Bank.
The scope of the central bank's capabilities includes not only establishing and implementing the state's monetary policy, but also setting the level of basic interest rates. In its actions, it must take into account the inflation target, which aims to keep inflation at a certain level.
In most countries, it is assumed that inflation should vary between 1 to 3%. It is vital to remember that inflation has a huge impact on interest rates, deposits, loans and bonds.
In the case of deposits, it should be taken into account that the interest rates offered by banks usually reach the minimum values that reflect the lack of possible threats to the invested money. Then, with the increasing level of inflation, there occurs a situation where deposits are no longer a profitable solution. Money deposited in a savings account over a period of time will lose much more value due to inflation than would be earned during that time. Banks very rarely decide to raise the interest rate on the offered deposits so that they are adequate to the inflation level in the country.
Inflation has an even greater impact on the interest rate of loans. As inflation rises, interest rates go up and annual interest rates of loans go up accordingly. As a consequence, the loan installment increases for borrowers.
Inflation also affects bond yields. Raising the inflation rate, and thus the interest rates, results in the necessity to pay more investors who own treasury bonds. This applies to inflation-indexed bonds in particular.
When analyzing the impact of inflation on interest rates, one cannot ignore the issue of real negative interest rates, which are a consequence of the easing of monetary policy. Negative interest rates make it unprofitable to keep assets in investments or bonds, which causes capital to be pushed to other asset classes, such as stocks, raw materials or real estate.
How to protect savings from inflation
The recent rises in the level of inflation effectively encourage people to make decisions about investing their savings. However, in the current situation, the opportunities offered by the market should be analyzed with particular care. Deposits or savings accounts are an example of one of the worst scenarios of investing money today. It should be remembered that their interest rate is already below any profitability margin.
The current level of inflation significantly exceeds the potential gains from safe financial products. Deposits and savings accounts do not provide any protection for your capital. At the same time, when deciding to buy treasury bonds, one should remember that they protect capital only up to a certain level of inflation. Hence, it is a good idea to use an inflation calculator before finalizing your purchase.
Certainly, it is a very good move to invest in real assets that offer higher protection from losing the purchasing power of money. For those looking to protect their money from inflation, the following investments should be considered:
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stocks
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commodities
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gold
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real estate
Is inflation a bad phenomenon?
Economists have been arguing about the assessment of inflation for years. Until recently, the perception was that inflation was bad for the economy. In particular, it referred to the situation where the rise in inflation led to a severe economic crisis. However, based on modern knowledge and the functioning of world economies, it is not possible to unequivocally assess inflation. Certainly, keeping inflation low is beneficial as it encourages those with savings to invest. This way of operating is beneficial to both the economy and society.
The benefits of inflation fade away when it starts to spin out of control. Then the situation begins to take a dramatic turn for the economy. A momentary lapse of attention by those responsible for controlling the inflation level is enough for the index to soar. High rises in prices are ruining citizens' savings. As a result, the economic situation can become complicated, which has been shown throughout history to potentially even lead to the destruction of markets.
Inflation is an economic phenomenon that everyone has to get used to. It should be borne in mind that inflation remains an inseparable companion of markets. The inability to avoid the impact of inflation on life speaks in favor of using the inflation calculator, because this way you can control the impact of this indicator on your capital. Monitoring the state of savings while controlling the level of inflation makes it possible to choose a more profitable solution and adjust your investing strategy.
Authors
Created by Lucas Krysiak on 2022-03-09 14:00:50 | Last review by Mike Kozminsky on 2022-03-12 14:14:17