Inflation : The Silent Threat - Part 1

About 30 years ago, a plate of nasi lemak costs less than RM1. Today, it has increased up to RM3, so do not be surprised to pay more than RM7 for your breakfast in the next decade! That is simply the work of inflation over the years! Just like the power of compounding interest, compounding inflation can have a severe impact in your standard of living if left unchecked. But what exactly causes this phenomenon and how can we overcome it?

What is Inflation?

Inflation is defined as sustained increase in the general level of prices for products and services, which is measured as an annual percentage increase. As inflation rises, every ringgit you own buys a smaller percentage of product or service. In other words, there is a decline in your purchasing power. For example, theoretically a RM1 cup of teh tarik will cost RM1.05 after a year if inflation rate for the period is 5%.

What Causes Inflation?

The two generally accepted causes of inflation are:

• High demand, low supply - If demand is growing faster than the supply of products and services, prices is forced upwards. Also known as demand-pull inflation, this normally occurs in growing economies when there is "too much money chasing too few goods".
• Rise in production costs - When the price of raw material goes up, production cost will rise, which leads to companies increasing process to maintain their profit margins. This also applies when employees demand higher wages as companies usually pass on these costs to the consumers.

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