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What is inflation? And how does it affect you?

Dezy Learn is a resource for all things finance. Wondering why things are starting to feel more expensive? It’s not all in your head.

Inflation 101

Inflation is eating your balance. Understand it.

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QUESTION

What is inflation?

ANSWER

Your money buys you less over time.

Put simply, inflation is when the cost of goods and services increase over time and purchasing power declines. This is illustrated in the image above where you can see the “basket of goods” one can get for $50 clearly gets smaller over time.

Change in prices of goods across the economy is never uniform. This is why an aggregate basket of goods is used to track and measure general inflation. This aggregated value is known as the Consumer Price Index or CPI.

What are the factors contributing to inflation?

When reading about inflation, one often finds it correlated to interest rates. 

The Federal Reserve in the United States is known for targeting 2% inflation rate based on the Consumer Price Index.

 

In this series we’ll break down the relationship between interest rates and inflation, and how this affects both risk on and risk off assets during the downturn. 

Is inflation good or bad? 

While high inflation is generally considered harmful to the economy, some economists believe that a small amount of inflation can help with driving economic growth. 

Different types of inflation

Inflation is not one size fits all. The term stagflation was trending a few months ago, yt this is just one of the variations of inflation.

Let’s explore the various types of inflation: 

  • Creeping inflation

    This is characterised by price increases of 3% or less per year. The Federal Reserve is of the opinion that a price increase of 2% or less benefits economic growth.

    This type of inflation changes consumer behaviour in that consumers make purchases now in order to beat assumed higher future prices. This thereby boosts economic growth.

  • Walking inflation

    When you see inflation of between 3% and 10% a year, it becomes harmful for the economy. This is because it heats up economic growth at an accelerated rate.

    Due to the perceived sense of scarcity, people purchase goods at a pace where suppliers aren’t able to meet demand. Neither can their wages. This means that common goods and services are priced above what the average person can currently afford.

  • Galloping inflation

    When inflation ticks past 10% this becomes a huge problem for the economy. Money starts losing its value too quickly for business and employees’  income to keep up.

    Foreign investors are no longer interested in the risk presented in the currency and local economy and this further deprives the country of needed capital.

    Economic instability is often followed by loss of credibility in the government. Galloping inflation is one to be prevented at all costs.

  • Hyperinflation

    Prices skyrocketing by more than 50% per month characterise hyperinflation. This is extremely rare.

    Hyperinflation occurs when governments print money to fund wars. The last time the United States experienced this level of inflation was during the civil war, where the money printing machine went into overdrive to fund the war.

    You can see examples of hyperinflation in Zimbabwe in the 2000s and Venezuela more recently in the 2010s.

 

  • Stagflation

    As the name alludes to, stagflation occurs when there is high unemployment and stagnant economic growth yet there continues to be price inflation. Why does this happen? How can prices go up when demand to push economic growth doesn’t exist?

    This happened in the United States when the gold standard was abandoned. This is what led fractional reserves in the banking system. Once the dollar value was no longer tied to gold, the value plummeted while the price of gold took off.

    • Core inflation

      Core inflation rate in the case of the United States, measures the prices of everything except for food and energy. Why? This is due to the fact that gas prices usually go up every summer. This is caused by families using more gas to take vacations.

      This increased gas price is then passed on to the price of food as everything has to absorb the now higher transportation costs.

      The Federal Reserve uses core inflation rates as guidance when setting monetary policy. Learn more about the relationship between interest rates and inflation.

  • Deflation

    When prices fall, or a bubble bursts - you can understand this phenomenon as deflation. Deflation is not good for the economy as it can turn a recession into a depression.

    Once deflation begins, it is harder to curb than inflation.

  • Wage inflation

    This type of inflation occurs when workers’ pay rises much more rapidly than the cost of living. This occurs under a few conditions:
    • Shortage of workers
    • Labor unions negotiate higher wages
    • Workers control their pay
      (CEOs effectively control their pay by sitting on many corporate boards) 

 

While the abovementioned are primary types of inflation, inflation can also hit a specific asset class. Some examples of this would be the housing market, oil, food and gold.

So what can you do about inflation? 

Inflation can be stressful, especially when you are barely making ends meet and living paycheque to paycheque. It might mean having to really pay attention while doing your grocery shopping, picking up a side hustle to add to your monthly cash flow and rethinking your savings strategy. 

We explore different ways in which you can both cut costs, increase cashflow and make your money work harder for you.

Savings accounts and fixed deposits aren’t helping you with inflation.

On average, a savings account or fixed deposit product in Singapore offers interest ranging between 0.75% through to 2.1% at best. These often come with nuanced terms and conditions which include minimum investment amounts, fees and lock-ins (in the case of fixed deposits.) 

Dezy rethinks the future of financial services by offering you a higher rate of return with 0 fees and lockin. Dezy is not currently licensed by the Monetary Authority of Singapore and does not hold any banking licences. 

How does Dezy offer up to 5.65% a year? 

Dezy is a fintech that wraps decentralised finance primitives so as to offer you a frictionless and easy experience when accessing the benefits of decentralised finance yields. Funds are diversified across a range of audited decentralised finance protocols and wrapped in DeFi native insurance to cover you in the case of smart contract vulnerabilities on any of these decentralised finance protocols. 

Dezy Learn equips you with the basics

Trying to brush up on your financial basics? Or perhaps you’re diving into decentralised finance. Either ways we have several modules that can help you understand the various macroeconomic forces in play and the different emerging technologies that are shaping the future.
  • 5.65% a Year (up to)
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DeFi 101

We answer this and more within our DeFi 101 series. Dive in.

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Stablecoins 101

Stablecoins are a type of cryptocurrency which holds stable value on the blockchain. There are several different kinds of stablecoins:
1:1 Backed Stablecoins
Overcollateralised stablecoins
Algorithmic stablecoins
Stablecoins facilitate several different transaction flows in decentralised finance.

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Inflation 101

Inflation has been growing in public consciousness due to the rising prices of core goods and services.
In our inflation series we cover what inflation is, what the relationship with interest rates is, how it affects different asset classes, and more.
Brush up on your inflation basics so that you can weather the storm ahead.

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What is Dezy?

Dezy is a fintech that offers users access to decentralised finance yields. Dezy uses one to one backed stablecoins in a diversified strategy to produce up to 5.65% a year with 0 fees or lock-in. See how we bundle DeFi native insurance to protect funds in instances of smart contract vulnerabilities. 

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    Dezy Pte Ltd UEN: 202116623N, 80 Robinson Road, #08-01, Singapore 068898
    Disclaimers:
    1. Decentralised finance is an emerging field with fluid regulations and not without risk.
    2. Dezy is not licensed by the Monetary Authority of Singapore.
    3. Learn more about how we mitigate risk for consumer protection with insurance, diversification, and technical security measures.
    4. Dezy insurance coverage applies only to certain assets / protocols where insurance is applicable. Learn more about insurance.
    Dezy Pte Ltd UEN: 202116623N, 80 Robinson Road, #08-01, Singapore 068898