To most of the people, inflation may not be a good thing because they need to pay more for their foods and living. Because of this, we need to pay attention to the economic world and prepare for inflation is there are signs of it. Inflation by definition is the sustained increase of sustained increase in the general level of prices for goods and services. People use an annual percentage when they refer to it.
Because of the close relationship between inflation and money, it affects our lives so much. As mentioned, when inflation rate is high, we are actually paying more for less. This implies the value of our money is decreasing in accordance to the inflation rate. And hence, our purchasing power is lower as well. Therefore, it is important to look for any signs of inflation.
The most obvious sign of inflation is the price of goods. A sudden increase in price in 1 or 2 months may not be related to inflation but seasonal factors. What we are looking for is a increasing trend of price of goods. We may refer to the moving averages of CRB index in the past nine months. If such commodity price index shows an increasing trend, inflation may take place.
It is inadequate to conclude if there is inflation by looking at price of goods only. We may also take a look at the trend of Consumer Price Index, CPI. CPI is a powerful index for inflation, which is used by Government agencies of many countries. CPI’s definition by the United States Bureau of Labor Statistics is “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services”. If CPI shows an increasing trend, inflation may take place.
Other than the price of goods and CPI, it is always useful to look at the gold price. Because gold is less correlated to other commodities and it is a safe haven for investors during inflation and financial crisis. Therefore, the gold price goes up during the time of inflation. This is not a coincidence but is actually evidenced bystatistics from Commodity Research Bureau.
Interest rate has always been a hot topic for economists and it is also a good sign of inflation. When inflation is going to take place, the long term interest is high and increasing. This is because money lender requires a profit on their money. In order to have such profit, their interest rate must be higher than that of an inflation rate. Therefore, interest rate goes up when there is inflation.