In December 2021, Mr. Ionescu paid 3.50 lei per liter of milk. A few months later, the same box of milk cost almost 5 lei. The price of bread also increased – from 1.5 lei a slice went up to 2.6 lei. Without further ado, when he went to the market with 100 lei in his pocket, Mr. Ionescu bought less food than a year ago. Much less.

For Mr. Ionescu, inflation only means that the money he has in his pocket is worth less every month. But inflation varies from person to person depending on their consumption habits. In addition, inflation differs from one region to another (one inflation in Bucharest, another in Caracalla). But no matter where you live, people on low incomes (pensioners, welfare recipients) will feel it more than those on high incomes.

Although the inflation rate reported by the INS was 15.1%, many people believe it to be higher. Let’s not forget, the figures in the statistics are averages, calculated on the basis of the prices of some goods in the consumer basket, but they do not include the cost of loan payments or rent.

In Romania, inflation is managed by the Central Bank. It’s not easy for her either. Think of the Central Bank as a chef standing with his hand on the handle that adjusts the level of the gas flame under the pan. If the economy doesn’t respond, the cook turns up the heat. If the economy boils, it includes a smaller one, writes the Bloomberg columnist.

But here too there is a problem: there is meat, potatoes, and onions in the pot. Some boil faster than others, and low (or high) heat helps some but kills others. The same as in the area of ​​prices. Prices do not move in unison.

H2: The effect of inflation

H3: 1. It reduces purchasing power

This is the main effect. An increase in prices reduces the purchasing power of consumers, since a fixed amount of money will allow the purchase of fewer goods. Consumers lose purchasing power regardless of the inflation rate of 2% or 16%; they just lose it 8 times faster at such a high rate.

What the National Institute of Statistics defines as inflation is just the weighted average rise and fall in the prices of all goods and services in a basket that reflects Romanians’ spending. These prices change for several reasons, including technological developments, consumer preferences, and changes in the cost of imports due to exchange rates.

We talk about inflation as a single number that applies to the entire economy. But each of us feels the rise in prices differently for the simple reason that everyone spends money on different things. The price of cigarettes is very important to smokers; the price of diapers is especially true for those with small children, and the price of gasoline is a significant expense for a Voluntari resident who commutes to the capital every day.

H3: 2. Inflation especially affects low-income people

Low-income consumers have small food budgets, and rising food prices further squeeze their budgets. As a share of income, they will have to allocate more and be left with less money.

In addition, people with low incomes do not have sophisticated investments that would allow them to more easily survive periods of inflation.

H3: 3. During inflation, it is better to have debt than to pay back money

If you have bank debt, inflation reduces the amount you have to pay back in real terms. On the other hand, if you loaned your neighbor 10,000 lei and he repays his debt by paying you 100 lei every month (for 100 months), you will get less money in real terms.

H3: 4. When inflation is high, it feeds on itself

Inflation of 2% is considered “good”. But if it grows strongly and remains high, people and companies begin to behave bordering on panic. People want higher wages to cover rising prices, and employers, if they raise wages, include it in the price of goods sold, fueling inflation.

H3: 5. Inflation leads to higher interest rates

For the past 100 years, inflation has been managed worldwide through central banks. When inflation threatens to exceed the central bank’s target (usually 2% in advanced economies and slightly higher in emerging economies), central banks raise interest rates, thereby making credit more expensive and forcing people (or firms) to borrow less.

The “Financial Dictionary” section is supported by Alfa Bank