WHAT IS INFLATION & WHY IS IT SO IMPORTANT?

So granted, finance isn't the sexiest of subjects, it can be a bit boring... fair point, but it is important,

The word "Inflation" is also not entirely flattering either, so I am going to explain it using the legendary chocolate bar of my childhood, the mighty Chomp bar!

You read correctly; I am explaining inflation using a chocolate bar...

THE CHOMP EXAMPLE

See, now there’s chocolate involved I’ve got your attention, let’s get started!

  • 5 YEARS AGO – I PUT £100 UNDER MY BED TO SAVE.
  • 5 YEARS AGO – THE MIGHTY CHOMP BAR WAS 10P EACH.
  • THIS MEANS AT THE TIME MY £100 COULD BUY 1000 CHOMP BARS.

FAST FORWARD 5 YEARS – I lift my bed, grab the £100, and decide I’m spending it all on a calorific treat!

I have the same £100 I started with, no more, no less right?

SADLY NOT…5 YEARS ON THE CHOMP IS NOT 10P, ITS 20P!

 

WHAT HAVE WE ESTABLISHED?

In 5 years, our money (our £100) has lost 50% of its buying power for this example.

This means now my £100 can only buy 500 chomp bars, as opposed to the 1000 bars I could buy 5 years earlier!

Definition of “Inflation” – the gradual decrease in the value of a currency or decrease in purchasing power.

Inflation sits at just around 10% right now. Your money needs to be making more than 10% or you are losing money each year!