Inflation affects all of us. It affects income, expenses and how we manage our investments. Unless your country is experiencing hyper inflation or high inflation, most of us won't notice its effect immediately. Normal inflation rate is between 3%-5% per year and hyper inflation is inflation rate higher than 50%. It is important to understand how inflation affects us since inflation affects the purchasing power of our money. The number of items you can purchase for One hundred peso today won't be the same ten years from now.
Inflation according to investopedia "the rate at which the general prices of goods and services is rising, and, subsequently, purchasing power is falling. It is important to understand how inflation works since the purchasing power of your money today won’t be the same in the future.
To better illustrate the effect of inflation we will use historical data of Philippine Inflation Rates in the past 50 years (1963-2013). Inflation rate in the Philippines peaked at 50.30% in 1984 and normalized in the past decade (2003-2013).
Below are the average annual inflation rate for the past 5 decades
- 10 years (2003-2013) - 4.67%
- 20 years (1993-2013) - 5.21%
- 30 years (1983-2013) - 7.96%
- 40 year (1973-2013) - 9.29%
- 50 years (1963-2013) - 9.15%
Money invested which earned less than 9.15% would loose its purchasing power. In order to counter inflation, investments should earn an annual interest of at least 9.29% if we based the inflation rate of the last 40 years. If use the inflation rate of the past ten years, our investment should be more than 4.67% in order for our investment to .
Inflation has increased the prices of items by a factor of 79 in the past five decades. You need to pay Php 79.72 for an item that was sold for Php 1.00 back in 1963. The purchasing power of a Peso in 1963 has reduced to 1.25% in 2013. Inversely, The money we consider a small amount today has a higher purchasing power 50 years ago.
In order to understand the effect of inflation rate let us examine the purchasing power of the Peso in the past 50 years. If the price of one sack of rice in 2013 is Php 2,000. How many sacks of rice can we buy in the the past five decades for the price of one sack in 20013.
2013 - 1 Sack of Rice (Php 2,000.00 per sack)
2003 - 1.5 Sacks of Rice (Php 1,333.33 per sack)
1993 - 2.75 Sacks of Rice (Php 727.27 per sack)
1983 - 10 Sacks of Rice (Php 200.00 per sack)
1973 - 35 Sacks of Rice (Php 57.14 per sack)
1963 - 80 Sacks of Rice (Php 25.00 per sack)
Understanding the effects of inflation will let you grasp the idea that you will are losing money if you don't put it to good use. Invest your money and let your money work and grow for you.