Why is the value of money falling?

Prices for products and services keep rising and falling. Most of the time, older generations complain that “everything used to be cheaper”. In 1950 a 250-gram packet of butter cost 1.38 DM, the equivalent of 71 cents, today the average price is 1.18 euros. The increase in prices from year to year is called inflation and is constantly changing in every country. Why an annual price increase is important and how inflation can be used to build up wealth - the most important facts at a glance.

Inflation in Germany - simply explained

As soon as prices for a certain number of goods and services rise and not fall again, economists speak of inflation. So the consumer gets fewer goods for the same amount of money. In other words, there is talk of monetary devaluation. Many Germans dread the fact that prices are rising steadily, whereas economists are in favor of an inflation rate of two percent. Because rising prices mean growth for the economy. A certain inflation rate is necessary because the economy is in deflation and is shrinking when prices are falling.

In times of uncertainty, consumers buy less and are reluctant to consume. In the long run, this promotes bankruptcies and the unemployment rate rises. Ultimately, this form is harmful to the economic system and can be controlled by politicians and the European Central Bank through various means. In the corona pandemic, in order to increase purchasing behavior, the federal government relied on reducing VAT on July 1, 2020. It can be observed that in times of crisis the inflation rate drops sharply. This was also the case in 2009 with the financial crisis.

There are different reasons for inflation. First of all, companies can raise prices when there is little supply but high demand. On the other hand, the price in production can rise. This happens, for example, when the statutory minimum wage is increased by politics or raw materials become more expensive. Oil and gasoline prices are primarily the cause of an increase in inflation.

How is inflation calculated?

Inflation is measured on a shopping cart with various goods. The average expenditure of all private households in Germany is added together. This results in a weighting for the individual goods.

  • Everyday products: Food, gasoline, electricity, newspapers
  • Long-term consumer goods: Clothes, television, car
  • Services: Insurance, rent, gym

The respective prices of the previous year, the so-called base year, are compared with the prices in the current year. The inflation rate of every single person differs from the average. For example, because different amounts of food are consumed and not everyone drives a car. Your own rate can be determined with the personal inflation calculator.

Who is one of the losers in inflation?

Low-wage earners, pensioners, welfare recipients and the unemployed are particularly hard hit. Groups of people who mainly spend their income on basic necessities such as food and rent. With interest rates below inflation these days, savers are also at a disadvantage and lose some of their wealth.

How can consumers benefit from inflation in Germany?

There are ways. Debtors in particular benefit from the fact that prices rise and debts lose value. With increasing income, for example, the debtor can repay his loan faster. Incidentally, this also applies to the state and companies.

Interest rates are currently very low, so it is not worth investing in a savings account. On the other hand, investing money on the stock market is more profitable. Investing in stocks or funds turns shareholders into shareholders in a company. The returns are usually higher than those of savers. It is important to choose the widest possible variety of stocks in order not to take risks with just one company. Companies in industries with low price fluctuations are recommended.

Another option is investing in gold and still profitable today. The value of one troy ounce has multiplied since the year 2000. However, experts are certain that the price of gold will rise less sharply in the future. It is also important to mention that there is no interest on gold. The gold price is very dependent on demand. Especially in times of crisis, this leads to a drop in demand and thus the value of gold. Compared to the inflation rate, however, the price increase for gold has exploded in recent years.

Comparison of the inflation rate in Germany with the gold price since 2000

yearInflation rate (in%)Average gold price (in EUR per ounce)Gold price increase (in%)
2021 (forecast)1,41764,214,67
2020 (forecast)0,51538,4523,54

Source Statista.de, Gold.de

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