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