Inflation is a increase in the general price level of goods and services, corresponding to a decrease in the currency’s value over time. Simply put, it signifies that the cost of living is rising. When inflation occurs, each unit of currency buys fewer goods and services than before.
The most common measure of inflation is the Consumer Price Index (CPI), which measures the average change in prices paid by households for a commonly purchased basket of goods and services. The CPI is expressed as a percentage change from a base period, which is usually set to 100. When the CPI increases over time, it suggests that inflation is occurring. A CPI of 110, for example, means that prices have increased by 10% since the base period.
Inflation can be caused by a variety of factors, including:
Inflation can have both positive and negative effects on the economy and individuals. Let’s take a look at some of them:
While inflation is a natural part of the economy, there are steps that individuals can take to protect themselves from its effects. Some of these include:
Cryptocurrencies have gained popularity as an innovative solution to tackle inflation.
One of the key ways in which cryptocurrencies can help tackle inflation is through their decentralized nature. Unlike traditional currencies, cryptocurrencies are not controlled by a central authority such as a government or a central bank. Instead, they operate on a decentralized network, which means that no single entity has control over the supply of the currency. This decentralized structure means that cryptocurrencies can potentially offer a hedge against inflation. As the value of traditional currencies erodes due to inflation, the value of cryptocurrencies, which have a limited supply, could potentially increase in value. This is because their supply is fixed, which means that they cannot be artificially inflated by a central authority.
Although cryptocurrencies like Bitcoin experience inflation, it is not subject to the same inflationary pressures as traditional currencies. This is because the supply of Bitcoin is limited through halving roughly every four years, countering inflation and preserving scarcity.
However, cryptocurrencies are susceptible to high volatility. It is also worth noting that all cryptocurrencies are not as effective as Bitcoin to address the issue of inflation. For instance, stablecoins are a type of cryptocurrency that aims to maintain a stable value. While they may seem like a potential solution to tackle inflation, they may not be as effective as one would hope. One of the main issues is that stablecoins are typically backed by fiat currencies such as the US dollar, which are subject to inflation themselves. This means that even if the stablecoin is maintaining its value in relation to the US dollar, it is still being indirectly affected by inflation.
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European Central Bank (2022) What is inflation? Available at: https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/what_is_inflation.en.html , last accessed 12.09.2023.
Fernando, J. (2023) “Inflation: What It Is, How It Can Be Controlled, and Extreme Examples,” Investopedia. Available at: https://www.investopedia.com/terms/i/inflation.asp , last accessed 12.09.2023.
Inflation: Prices on the Rise (2019). Available at: https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation , last accessed 12.09.2023.
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