#012: Personal Inflation
On how your inflation and the economy's inflation differ.
Hi friends,
Welcome to another issue of my newsletter.
Inflation is a topic I have written on before here. Intending to write extensively on this topic before the year runs out, this week's issue is a primer on what I call personal inflation.
Inflation is one of the metrics used to determine how the economy is fairing. Too much and people can't afford good too little, and the economy isn't stimulated -from the government's perspective.
For an individual, it comes in two ways:
1. If you hold cash, your purchasing power is reducing. That means what your $1 could buy last year is more than what it would buy this year. Goods get more expensive.
2. If you have assets, especially real estate, the value increases at almost the same rate as inflation. Other assets usually bit inflation. This means the value of your assets increases at the very least as inflation increases.
Now you are wondering, so what?
Suppose an individual is poor- who would spend most of his income on his needs -food, healthcare, rent etc. All these increases with inflation.
If an individual is well off, he can spend a limited amount on these too while still having enough to invest. Therefore reducing the effect inflation has on his spending/income.
While a country's inflation might be low or high, it is usually nominal because the inflation rate I usually for the economy as a whole - including industries that have little to do with certain individuals.
If food inflation is 5%, and the toys(children entertainment) is 1%. The aggregate between these two is 3%. This doesn't mean my inflation is 3% if I don't spend any amount on children's toy, but I spend on food. Then my inflation would only be 5% as opposed the 3%.
This is personal inflation.
Calculating your inflation based on the inflation of industry's or commodity that you spend on.
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That wraps it and see you next week.
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