Inflation may sound like a fancy word for blowing balloons up, but sadly, is no, although it can relate if you think of the growth of the cost of stuff
Inflation is the general increase of prices over a period of time, or the increase in the cost of stuff.
To calculate inflation, specialist gather sorted products and services, and write down their prices at the beginning of the exercise and at the conclusion of it; that way they compare the differences among each product, then compare the results with it to the original prices.
As long as inflation grows, it is accurate to say that money loses its purchasing power over the time.
In an ideal world, people should earn more every year, at least enough to cover inflation, but since this is just a fantasy, we should take in consideration inflation whenever we make financial plans.
In economics, inflation is a general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.
In the US, inflation is calculated by the Bureau of Labor Statistics through the Consumer Price Index (CPI) constructed each month using 80,000 items in a fixed basket of goods and services representing what Americans buy in their everyday lives.
In the other hand, when prices tend to shrink it's called deflation, an indication of lower prices and the gain of acquisition power of money over time and the shrinkage of the cost of stuff.
Although, when a country experiences deflation, it may mean a risk for its economy, because prices may be decreasing in lack of demand, meaning people are not buying and consumption is decreasing as well.
With no further analysis, it is important to know what inflation mean in order to manage our own personal finances, now we can project more realistic goals, and take in consideration the real purchasing power of our money when ever we make an investment.
