Inflation

Definition : Inflation is a continuous increase in the prices of goods and services. This implies a continuous decline in the purchasing power of money.

Example : Inflation Senario

Assume an economy only has one good - orange
Price of 1 orange - 40 cents
Consumer Mr. Lee's income = RM100/month, can buy RM250 oranges.
Seller Mr Tan's income = 1000 oranges @0.4 = RM400

Next 3 years, price of orange= 50 cents
Inflation rate = 25%
Consumer Mr. Lee's income = RM100 per month can buy 200 oranges.
Seller Mr. Tan's income = 1000 oranges @0.5 = RM500.

Consumer Mr. Lee is worse off.
Seller Mr. Tan is better off.


Question: As consumer/employee, do you prepare yourself to hedge against inflation in coming years? Is your income higher than inflation?