Inflation is something that affects every single country around the world.
It is not necessarily a bad thing, but it is something you need to know about.
It can be extremely confusing and hard to understand inflation.
In fact while doing research on inflation I found that even the professionals had different opinions on the subject.
So I will try and keep this as simple as possible for this article.
Government departments track the price of things month to month.
This includes everything from petrol, food, cleaning products, takeaway and much more.
From this they can work out an average of what things cost say from 2009 to 2010.
The government tries to keep inflation at somewhere between 2.
5% and 3.
5% each year.
This is monitored by the Reserve Bank of Australia.
So the bottom line is that if you spent $1000 (on various things) in 2009 and in 2010 inflation went up 3%, the same products would cost you $1030.
Now you have to understand that some products will drop in prices.
However what the government looks at is an average of the whole.
Why is this important? Let's pretend you have been working for the same employer for 10 years.
Each year they reward your hard work with a 3% raise.
If inflation is running at 3% your money has the same buying power as it did last year and the same buying power as it did ten years ago.
This means that it cancels out any benefit from your raise.
That means that you could have effectively been working at the same place for the same money for ten years.
Now when I talk about money, of course you are earning more, but it has the same purchasing power.
You would need to get a 4% raise in order to start getting ahead.
Every time you get a raise you should not think about it in terms of dollars but in terms of what percentage that is.
Also consider what inflation is running at for that year.
Putting it in a different way, let's pretend you are at school and your teacher gives you a test.
You study for the test and get an A+.
However the teacher is tightening his standards on the next test the following week.
If you put in the same effort you will only get an A-.
So you have to work harder to get the A+.
This is similar to inflation.
If you don't get a pay rise for two years and inflation keeps going up (as 90% of the time it does) your money will have less purchasing power.
Let's look at real figures.
From Jan 1st 2000 to Dec 31st 2008 inflation has been running as follows.
2000 2.
5% 2001 3.
1% 2002 3.
0% 2003 2.
4% 2004 2.
6% 2005 2.
8% 2006 3.
3% 2007 3.
0% 2008 3.
7% Let's take the example of Fred.
Fred is a bus driver who took up his job on Jan 1st 2000.
This was at a starting salary of $35,000.
Fred is a model worker who has been an excellent driver.
Each year his company rewards Fred with a 3% pay rise.
In fact by 2008 he is earning $44,336.
This is a 27% increase from his 2000 wage.
However inflation has gone up by 29% (Please note this is a real figure).
What this means is that if you purchased a bag of shopping in 2000 for $100 it would now cost you $129.
00.
As you can see, Fred is actually behind the 8 ball.
He is earning less now than when he started.
No not less money, but less purchasing power.
Fred's company values Fred less now than when he started, as far as what Fred could purchase with his money! Even though Fred has been a model worker, his company has gotten away with only giving him pay rises that are less than inflation.
The moral of the story is that when your work gives you a pay rise how does this sit with inflation.
Are they giving you any more PURCHASING POWER? Or are they only giving you the same purchasing power going forward? Or are they giving you even less! This is an extremely interesting subject.
My advice is that you should work out what amount of money you have been getting paid since 2000.
If you are not getting paid 29% more in 2008 than 2000 you are actually going backwards.
It is not necessarily a bad thing, but it is something you need to know about.
It can be extremely confusing and hard to understand inflation.
In fact while doing research on inflation I found that even the professionals had different opinions on the subject.
So I will try and keep this as simple as possible for this article.
Government departments track the price of things month to month.
This includes everything from petrol, food, cleaning products, takeaway and much more.
From this they can work out an average of what things cost say from 2009 to 2010.
The government tries to keep inflation at somewhere between 2.
5% and 3.
5% each year.
This is monitored by the Reserve Bank of Australia.
So the bottom line is that if you spent $1000 (on various things) in 2009 and in 2010 inflation went up 3%, the same products would cost you $1030.
Now you have to understand that some products will drop in prices.
However what the government looks at is an average of the whole.
Why is this important? Let's pretend you have been working for the same employer for 10 years.
Each year they reward your hard work with a 3% raise.
If inflation is running at 3% your money has the same buying power as it did last year and the same buying power as it did ten years ago.
This means that it cancels out any benefit from your raise.
That means that you could have effectively been working at the same place for the same money for ten years.
Now when I talk about money, of course you are earning more, but it has the same purchasing power.
You would need to get a 4% raise in order to start getting ahead.
Every time you get a raise you should not think about it in terms of dollars but in terms of what percentage that is.
Also consider what inflation is running at for that year.
Putting it in a different way, let's pretend you are at school and your teacher gives you a test.
You study for the test and get an A+.
However the teacher is tightening his standards on the next test the following week.
If you put in the same effort you will only get an A-.
So you have to work harder to get the A+.
This is similar to inflation.
If you don't get a pay rise for two years and inflation keeps going up (as 90% of the time it does) your money will have less purchasing power.
Let's look at real figures.
From Jan 1st 2000 to Dec 31st 2008 inflation has been running as follows.
2000 2.
5% 2001 3.
1% 2002 3.
0% 2003 2.
4% 2004 2.
6% 2005 2.
8% 2006 3.
3% 2007 3.
0% 2008 3.
7% Let's take the example of Fred.
Fred is a bus driver who took up his job on Jan 1st 2000.
This was at a starting salary of $35,000.
Fred is a model worker who has been an excellent driver.
Each year his company rewards Fred with a 3% pay rise.
In fact by 2008 he is earning $44,336.
This is a 27% increase from his 2000 wage.
However inflation has gone up by 29% (Please note this is a real figure).
What this means is that if you purchased a bag of shopping in 2000 for $100 it would now cost you $129.
00.
As you can see, Fred is actually behind the 8 ball.
He is earning less now than when he started.
No not less money, but less purchasing power.
Fred's company values Fred less now than when he started, as far as what Fred could purchase with his money! Even though Fred has been a model worker, his company has gotten away with only giving him pay rises that are less than inflation.
The moral of the story is that when your work gives you a pay rise how does this sit with inflation.
Are they giving you any more PURCHASING POWER? Or are they only giving you the same purchasing power going forward? Or are they giving you even less! This is an extremely interesting subject.
My advice is that you should work out what amount of money you have been getting paid since 2000.
If you are not getting paid 29% more in 2008 than 2000 you are actually going backwards.