what's up everyone it's kenji here back with some explainer type videos and today i want to
talk about inflation so in short very simply put inflation is just the general rise in prices and
emphasis on the general it can't just be say avocados rising in prices because they're very
trendy on instagram or something like that it has to be a general bundle of goods and services
so now that we have a basic definition let me walk you through what we'll cover
throughout the video so firstly i want to look at how it's actually calculated then we'll look
into the target inflation rate thirdly we'll look over the causes of inflation and lastly
we'll look at how you can protect yourself against inflation as an individual so let's look into how
inflation is actually calculated and when you think about it it's actually not that simple
as economists they can't just go to every single store and see every single item in a country and
see if that price is going up or down right that'd just be way too complicated so instead
they rely on a basket of goods and services which they call in the us at least the cpi which stands
for the consumer price index so the cpi consists of a basket with all the things that your average
consumer might need and that's obviously not just food right there's other things like transport
medical care clothing and so on and so forth that's also going to be accounted for here
and basically they're going to collect all the items and once they have that they're going to
put different weights on them right because some are more relevant than others so for example take
a birthday cake right maybe people have that once a year or twice a year so it's going to
have a lot lower of a weight compared to something like water which pretty much everyone has and on a
daily basis right so they basically put different weights on all the things and that's how they
account for the cpi now with that cpi number they're going to apply a simple formula that's
this year's cpi minus last year's cpi divided by the current cpi times 100 that's basically
going to give them the inflationary so how much inflation is actually good as an individual you're
probably thinking well if inflation's negative which is known as deflation everything costs
less for you so that's probably good for you right you basically can buy more things for less
well that's not always the case and let me show you why unfortunately it's not quite that simple
and that's basically because if things are cheaper all around that also means that sooner or later
your salary is going to be less rate because companies are not going to make that much money
and so they're not going to be able to pay you so much in salary so more or less the estimate
that economists go for in developed nations is around the two percent mark which is somewhat
rising but at the same time it's rising slowly such that uri when we go to the supermarket we're
not really gonna realize that the prices have gone up in one year right now on the flip side there's
what's called hyperinflation which is basically when inflation's gone wild and it's skyrocketed
a recent example is actually in venezuela back in 2018 they had an inflation rate of around 65 000
that's right 65 000 i know it's completely absurd that basically meant that if you had a salary
um within minutes it was basically worthless because the inflation rate was so high right
so as a result it obviously had some devastating consequences on the country let me show you an
example so a cup of coffee used to cost around 0.45 bolivars which is their local currency
whilst after this hyperinflationary period it costed around 1 700 bolivars so basically if you
were earning a salary of say 1 500 bolivars back before this hyperinflationary period
0.45 cents wasn't that much to you but after it's hyperinflation then all of a sudden you can't even
afford coffee right so unless the salaries have adjusted very quickly you've basically run out
of money and that's an example of inflation going completely wrong and as a result venezuela which
is actually one of the most oil rich countries in the world is in complete turmoil there's obviously
other political factors and so on but inflation is definitely one of the big ones to play so now
that we've seen this crazy hyperinflation example let's look into what actually causes inflation
so in textbook economics there's really two main causes for inflation the first one has to do with
demand pull inflation and the second one with cost push inflation i know they sound like very
fancy terms but they're actually quite simple the mount pool is basically when there's too
much demand for something and not enough supply right so an example in venezuela actually could
be some basic goods like toilet paper that they were actually not able to bring into the country
so as a result the price of toilet paper skyrocketed because well there was a lot of demand
but there was just not enough supply for it now on the flip side there's what's called the cost
push inflation and that's basically when things are too costly and as a result they have to put
up the prices to be profitable right and a bit of an example could be for instance with oil prices
as countries go further and further into the ocean and have to dig deeper and deeper
that basically means that it's more costly for them to find the oil and as a result oil prices
could go up right that's just an example it's not necessarily the case so now that we've seen
inflation and why it's caused let's look into how you can actually protect your downside which
is also known as hedging now one of the easiest ways to hedge against inflation is just by buying
stocks it can be apple stocks it can be amazon stocks or whatever other one you want but overall
within the stock price the actual inflation rate is accounted for so that's a fairly simple hedge
it's not perfect but it typically does the job some other ones include real estate where again
the inflation rates actually accounted for in the value of the real estate so if inflation is high
odds are the real estate is going to appreciate in value as well and then one last one has to do with
tips which stands for treasury inflation-protected securities a lot but i don't really want to get
into those as it's quite complex so that's all for this video i hope you found it useful
if you did feel free to like and subscribe and if you want me to cover any particular finance
topic in the future feel free to comment that down below and i'll catch you in the next one