Most people work extremely hard for their money and would report that they take an active interest in keeping their earnings safe, but the vast majority of them probably don’t know how inflation is measured and calculated.
But inflation can have a big impact on the value of your money, reducing its value over time.
How Is Inflation Measured and Calculated?
Before we discuss how inflation is measured and calculated, let’s briefly make sure we’re all on the same page about its definition.
What Causes Inflation?
While there are many factors at play, here are two economic realities that can affect inflation.
Consumer Confidence is a big one. Low unemployment and stable wages might convince consumers it’s safe to spend their money – even spend more of it than usual. As a result, manufacturers charge more for their products and services.
There’s also monetary policy to consider. In the United States, that’s largely controlled by the Federal Reserve. If the Fed decides to increase the supply of money, its value will drop – which also causes inflation to spike.
Calculating and Measuring Inflation
One way way to measure inflation is by referencing the Bureau of Labor Statistics’ Consumer Price Index. It’s a statistical estimate that derives inflation amounts by looking at a sample of representative products and services over time.
While there are a number of agencies that measure the change in these prices, the CPI analyzes tens of thousands of products and services every single month, making it a reliable source for the rate of inflation.
The Bureau of Labor Statistics actually provides a CPI inflation calculator, which you can use to measure how much your money is worth today compared to other dates.
For example, you’ll find that $100 nowadays can only buy about as much as $71.43 could back in 2000.
In fact, the buying power of $100 today has shrunk by about $00.90 90 cents in less than a year.
Protecting your money from inflation
There’s really not too much you can do to eliminate the effect of inflation on the money supply,and the cost of goods and services.
That said, you can still grow your money so that it stays ahead of inflation’s effects. By investing your money and leveraging compound interest, you could potentially protect it from inflation, instead of having that value depleted by losing purchasing power.
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