Inflation and Monetary Policy Essay
The inflation rate affects consistently not only the development of the national economy as well as the global economy but also the inflation rate affects average citizens. In this regard, the high inflation rate is particularly dangerous for average citizens because it prevents them from many purchases and raises the problem of the devaluation of their savings and earnings. At this point, I would refer to my personal experience. Even though the inflation rate in the US was relatively low but the probable substantial rise in the inflation rate can affect my financial position and my financial plans consistently.
First of all, I would distinguish my savings and my earnings because the high inflation affects them both but the high inflation rate will have different effects on my savings and earnings. On the one hand, I have some savings, which I plan to use in a long-run perspective. For instance, I have savings which I plan to use when I retire as well as I am going to spend a part of my savings on education of my children. Naturally, the high inflation rate will devaluate my saving. To prevent this, I deposit my savings in bank. However, if the inflation rate is higher than the bank interest rates, I will lose not only a part of possible earnings but I will also face a problem of a considerable devaluation of my savings because I will not be able to buy as much products in a year of a high inflation as I can buy now. If the trend to the high inflation rate persists, my savings will become pointless because, in the course of time, I will just lose my money for nothing. In such a situation, I would have to invest my savings immediately in a real estate or stocks or whatever that can bring me more money than inflation devaluates. For instance, if the inflation rate is 10%, I have to earn more than 10% to be able to buy the same amount of goods or services at average. Hence, in a long-run perspective, the high inflation rate will just ruin my retirement plans as well as my plans concerning education of my children.
On the other hand, the high inflation rate will decrease my earnings because of the devaluation of the currency. What is meant here is the fact that the high inflation rate deprives me of the possibility to maintain the same standards of living that I used to. For instance, now I can buy a car after a year of work but, if the inflation rate raises 50%, for instance, I would have to work twice longer to buy the same car that I could buy in a year. Consequently, the high inflation rate devaluates my earnings and deteriorates my conditions of living as well as decreases my standards of living because I have to refuse from something or decrease my savings to maintain normal standards of living.
Thus, the inflation rate affects consistently the life of average people. The high inflation rate devaluates savings and earnings of people and decreases their standards of living.