๐ฅช The Shrinking Sandwich: The sandwich hasn't changed, but your money has weakened. ยฃ100 saved under a mattress in 2010 buys significantly less today. Inflation is an invisible tax on savings and cash โ it rewards borrowers (whose debts shrink in real terms) and punishes savers (whose purchasing power erodes).
CPI Inflation Rate =
(CPI this year โ CPI last year) รท CPI last year ร 100
Example: CPI was 105 last year, 108.15 this year โ Inflation = (108.15 โ 105) รท 105 ร 100 = 3%
(CPI this year โ CPI last year) รท CPI last year ร 100
Example: CPI was 105 last year, 108.15 this year โ Inflation = (108.15 โ 105) รท 105 ร 100 = 3%
๐ฅ Demand-Pull
"Too much money chasing too few goods." Economy booms, employment rises, consumers spend freely โ firms respond by raising prices rather than producing more.
โ๏ธ Cost-Push
Rising input costs (oil, wages, raw materials) force firms to raise prices to protect margins. 1970s oil shocks are the classic example.
๐ธ Monetary
If the money supply grows faster than output, each pound becomes worth less. Hyperinflation (Zimbabwe, Weimar Germany) results from unconstrained money creation.
๐ฏ UK Target
Bank of England targets 2% CPI. Below: risks of deflation (also dangerous). Above: erodes purchasing power. 2% is considered a "Goldilocks" rate.
๐ก Winners and Losers from Inflation:
Losers: Savers, pensioners on fixed incomes, creditors (lenders), people on fixed wages.
Winners: Borrowers (real debt shrinks), property owners (asset values rise), firms with pricing power.
Losers: Savers, pensioners on fixed incomes, creditors (lenders), people on fixed wages.
Winners: Borrowers (real debt shrinks), property owners (asset values rise), firms with pricing power.