How inflation works: why your money buys less every year
What is inflation? Why the same money buys less over time
Nobody takes a cent from the cash you saved, and it still buys less almost every year. What is inflation, and why does the same money buy less over time?
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1
Miva runs a small ice cream shop on the beach, and her ice cream is the best in town. You put $30 in a jar to spend there. At $3 a scoop, that is enough for 10 scoops.
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2
A year later, you open the jar. It still holds $30: nobody took a cent. But the board in the shop now says $3.30 a scoop.
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3
So your $30 buys only 9 scoops now, with 30 cents left over. The money did not shrink. What it can buy did.
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4
And it is not only ice cream. The bus ticket, the bread and the rent cost a little more too. When prices in general rise like this, economists call it inflation.
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5
A little each year adds up. In the United States, what cost $1 in 1970 cost about $8 in 2024. What your money can buy is called its purchasing power, and inflation makes it smaller year after year.
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6
Rono works at the shop: he scoops the ice cream. He is not so sure about all this. His new phone cost less than his old one. Some prices go up, and some go down. So to say that prices "in general" rose, someone has to count all the prices.
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Quick check
Your pay and your prices.
Show the answer
Less. Your money grew, but prices grew faster, so its purchasing power went down.
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Go further
Three words that come with inflation.