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Inflation - where does it come from and how do we deal with it?

25 May 2022

Every day we can see rising prices of food and many other products on shop shelves. The offers of deposits and savings accounts in banks, which offer minimal interest, are not satisfactory either. These are just a few effects of the growing inflation in Poland.

We encourage you to read the AFORTI Exchange article, describing the reasons, effects and ways to fight inflation.

Starting from a definitione

Economist David Begg defined inflation as "an economic phenomenon consisting in an increase in the general level of prices of goods and services offered in the economy”. Such changes are distinguished by trends, sustained over an extended period of time. At the same time, there is a decrease in the value of money and an increase in costs. It is worth mentioning that there is also the phenomenon of deflation - an increase in the value of money.

How do we find out about inflation? It is told by the most popular CPI indicator - the Consumer Price Index (CPI). The CPI determines changes in the prices of consumer goods and services on the basis of the weighted average price of purchases of an average household.

Rising oil prices are often considered the most common cause of inflation, affecting the transport, trade, industry and service sectors. Oil supplies food on a daily basis, logistics and shipping are just a few of the elements that build the national economy. Other causes of inflation are found, among others, in:

  • excessive money emission
  • defective structure of the economy
  • excessive bank lending
  • monopolisation of the economy
  • an unbalanced state budget

What does inflation lead to?

The first effects of rampant inflation have already been observed since the Central Bank decided to combat it by raising interest rates. We then started to pay back the increased instalments on the loans we had taken out. This also translates into our spending in grocery shops, shopping malls or the cost of services.

Inflation is perceived as a negative phenomenon due to its social effects by consumers, but also by contractors, who lose confidence in a currency whose value is falling. An unstable situation of the zloty may discourage a business partner from international transactions. As a reminder, we encourage you to read the article about the records on the currency market in March:

Inflation distorts the real value of goods. The price charged for a product no longer reflects the value of materials. Sudden price changes also affect purchase motivations. Some consumers, as a result of price increases, are inclined to change products or services for similar and cheaper ones from the same sector.

As a result of the loss in the value of money, there are many changes in the credit market. It becomes more difficult for borrowers to obtain funds for their intended purpose. His ability to make his own contribution to the loan also decreases. The situation is also difficult for the lending bank, which may have less value for the money after the loan is repaid than before it was granted. In the end, the bank or lending institution may lose money on this transaction. This is prevented by interest rates, which determine the price that must be paid for obtaining money.

In the face of inflation, the planned return on investments or savings becomes uncertain. By placing funds in term-limited deposits, it becomes more difficult to estimate the profit recorded on the investment.

An effective way to escape inflation may be to exchange your currency for a foreign currency, waiting for its value to rise, or to use your foreign currency funds for a foreign currency investment. We encourage you to register on our free AFORTI Exchange platform. 

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