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Since this coin has been minted in 2016, inflation curtailed its purchasing power by more than 10%.

Picture by: Steve Smith / Unsplash

Fallout of the pandemic is the first time Gen Z experiences inflation

What is inflation, what it does to your wallet - and what The Old Lady of Threadneedle Street has to do with it?

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Our generation has not previously experienced inflation. Most of us are not hugely concerned whilst relying on our parents for satisfying our needs, and thinking of future stages of studies. The latter of Gen Z have started working, and for millennials inflation has hit for the first time during their lifespan. For Gen Z-ers growing up in an era of an average 2% inflation, the reality is that we do not know what it is really like. The past resilience to spend is missing, along with the ability to budget long term.

Boiled down to its essence, inflation is a process of rising prices – or, to be more precise, the devaluation of money. If inflation is at 5% (5.1% is the current level of inflation in the United Kingdom) prices are 5% higher than a year ago – so, on average, the same thing that used to cost £100 is now priced at about £105.

This may not seem like a big issue, but amassed over time, inflation makes a huge difference. For example, in 1837, when slavery was being abolished in the UK, the Slave Compensation Act was signed into law and £20 million was spent on compensation (sic!) for slave owners across several British colonies.

Today, £20 million does not seem like much, at least for a state budget figure. In 1837, however, it was a fortune - because of inflation £20 milion was then worth as much as £2.3 billion in 2020.

Inflation is measured by governmental statistical agencies – the Office for National Statistics (ONS) in the UK, Eurostat in the European Union, Bureau of Labour Statistics in the United States – by using various indexes. The one most commonly used is Consumer Price Index (CPI) which measures the rise of prices across 700 goods and services, including, among other things, food, transport and entertainment. This ‘basket is reviewed every year because peoples tastes and spending habits change over time, for example in 2021 hand sanitiser, smart watches and home weights were included. There are other indexes, with baskets assembled to reflect experience in different parts of the economy.

Inflation in itself is not considered good or bad, it is a phenomenon which is linked to wider macroeconomic processes. What is considered problematic is excessive inflation, which could spiral out of control. In Turkey for example, annual inflation is now at 36%, a level which wreaks havoc on everyday life, as savings diminish, planning household or firm budgets becomes enormously difficult and number of people find out that they can no longer afford to have their basic needs met.

Historically, the record levels of inflation were noted in Berlin after World War 1, when the price of a loaf of bread rose from 160 marks to 2 billion marks between 1922 and 1923.

A ‘healthy’ inflation is considered to stand at around 2% annually – this is the target set for the Bank of England, an institution responsible for monetary policy in the United Kingdom. 2% is considered to be stimulating economic growth, not to be dangerous for consumers and to be far enough from the risk of going into deflation (whereas inflation is negative and hugely impedes economic growth).

To control inflation, central banks will use interest rates. Fundamentally, an interest rate says how much money will cost – the higher the interest rate, the higher the amount a lender charges a borrower to loan any amount of money. As the availability of money falls down, so does inflation – but also the entire economy cools down.

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James Gillray's 1797 cartoon gave The Bank of England one of its nicknames.

Learn more: The Bank of England

In the UK, interest rates are set by the Monetary Policy Committee of the Bank of England. In December 2021, in response to rising inflation, Threadneedle Street (as Britain’s central bank is often referred to) decided to increase the base interest rate to 0.25% – up from a record low of 0.10% which was introduced to stimulate the economy during the downturn caused by the COVID-19 pandemic.

The reaction of British authorities may seem preemptive, but the most common among the economists is that it is best to tackle inflation very early, because otherwise it may spiral out of control. This is currently happening on the other end of Europe as previously mentioned, in Turkey, where president Recep Tayyip Erdoğan uses his somewhat dictatorial powers to order the central bank to slash interest rates despite soaring inflation. In effect, year to year inflation in Turkey is set to increase from its current 36 percent – economists expect it to reach 42 percent in the spring of 2022. The Turkish lira has lost nearly half of its value against the dollar in 2021.

For most people, budgeting and saving is now impossible. A college student, Montoya, who needs money to meet the demands of everyday life, the solution was to rent out her spare bedroom to tourists, despite being terrified of “staying at home with someone I don’t know”, as she told the Marketplace. Another young adult was prepared to leave Turkey for Germany to pursue his degree in engineering, as his family saw no future in their country. The only way to restore Turk’s confidence in the lira would be to raise interest rates, but Mr Erdogan seems unbothered by classic economics.

As it is an economy-wide phenomenon, an individual cannot do much to protect their budget from inflation. Only those who have money may attempt to act before their savings devalue and exchange them for a more stable currency or invest their money into something holding value, such as real estate, gold, or artworks. For most of us, those earning and spending on a monthly basis, the only hope is reasonable fiscal policy from decision-makers.

Written by:

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Natasha Banga

Economy and Science Section writer

United Kingdom

Born in 2004 in London, Natasha Banga currently attends Francis Holland School in London, where she studies physics, economics, maths and further maths. She plans to study pure mathematics at university in either the United Kingdom or the United States. At Harbingers’ Magazine, she writes mostly about economics and science. For five years Natasha lived in Chandigarh, India. She has fluent command in three languages – English, Hindi and Punjabi – and is currently learning Spanish.

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