Term of the Day: Inflation

Inflation is the rate at which general level of prices of goods and services is rising and, consequently, the purchasing power of currency is falling. For example, if the inflation rate is 2%, then a pack of gum that costs $1 in a given year will cost $1.02 the next year.

Inflation is generally measured in terms of a consumer price index (CPI), which tracks the prices of a basket of core goods and services over time.

In the Philippines, as of January 2017, inflation is 2.7% matching DOF's internal forecast which is within the target range of 2% - 4%. Source: http://www.dof.gov.ph/index.php/dof-expects-inflation-rate-within-government-target/

Because of inflation, people invest. Assuming the 2% inflation, a savings account that was worth $1,000 would be worth $903.92 after 5 years and $817.07 in 10 years assuming that you earn no interest rate on the deposit. (Interest rates in the banks usually ranges from 0.25% to 1% which is lower compared to the inflation rate of 2%). That's why it's important to invest in assets that can be reasonably be expected to yield at a greater rate than inflation. (Before doing any investments whether in stocks, bonds, real estate, business etc., due diligence must be done.)

Source: Investopedia

 

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