What Is Inflation and How Does It Work?

You might have heard about the term ”inflation” on TV or Youtube but never really understand what it means or its impact on your day to day life.

Inflation occurs when a large amount of money is printed in a short period of time without having an important reason to do it. Because of the more units of money that come on the market with no proper place to be spent on, money starts devaluing compared with other currencies.

Today, most countries prefer a low, steady inflation rate. Inflation affects economies in various ways. The negative effect that can occur is the fear of holding money over a long period of time which discourages many investors to save or to invest. The positive effects of inflation could be reducing unemployment and encouraging loans and investments instead of holding the money for a long period of time without knowing what to do with it.

The worst inflation recorded, also known as hyperinflation, took place in Hungary where the pengő (the currency in Hungary at that time) reached 29 0. Even though the pengő was introduced as a solution for the stabilisation of the country after World War I, the currency survived only for 20 years. Such hyperinflation cases are harmful for the country where they occur.

To conclude, I would like to say that holding an amount of money over a long period of time without knowing what to do with it or having a plan can have several negative effects.

Editor- Teodora Ioana Magan