What is inflation? Learn how it affects your income

Find out what inflation is and how it affects your life!

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Do you really know what inflation is and how it impacts your purchasing power and investments?

It is used to explain the increase in the price of products, rent, salaries, among others.

Inflation is indeed present all the time in our lives. But few people know the impact it has on personal finances.

To learn a little more about this term, and understand how it affects your day-to-day life and your investments (if you are an investor), continue reading.

Let us explain how it all works.

What is inflation?

Inflation is the increase in products and services over time.

You've noticed that prices are rising, haven't you? This is all the result of inflation.

It can be short-term – increasing in one month – and long-term – increasing continuously over 12 months, for example. In each of these cases, inflation occurs for different reasons.

Inflation in the short term is caused by increased demand. In other words, if in a given period, many people start looking for a product, it is natural that it will become more expensive.

This also happens when there is a large supply of credit: when purchasing power increases, people tend to spend more, which obviously increases demand.

Inflation in the long term, is caused by two other reasons:

• Issuance of paper money

• Lower the interest rate

When government spending is greater than revenue, it becomes necessary to print more money, that is, issue paper money.

Issuance causes the volume of money to be relatively greater than the supply of products. For this reason, prices rise.

But what about the decrease in interest rates, what does that have to do with it?

In 2021, the Selic rate, the economy's basic interest rate has undergone several increases. 

Increasing the Selic rate is one of the ways the government found to control inflation.

When the rate is low, investments in savings and government bonds tend to yield less. In addition, loans become cheaper. This stimulates consumption and supply. However, in the long term, this can lead to higher prices.

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How does inflation affect your pocket?

Inflation causes money to lose value, as it does not keep up with rising prices.

In other words, the higher the inflation, the greater the loss of value.

Furthermore, it distorts prices, as people start to have difficulty keeping track of what is more expensive or cheaper.

Inflation certainly has social impacts, as Brazilian workers do not usually see their salaries adjusted in the same proportion as the increase in prices.

Furthermore, it is important to remember that inflation impacts personal and family budgets in several ways, such as:

• Daily expenses

• Payment for services rendered

• Investments

How to control inflation?

The government actually does not have the power to control inflation.

However, there are some decisions that can influence it.

We have already talked about the Selic rate, which is determined by the Central Bank. It controls inflation, increases taxes and also raises prices, as it reduces the amount of currency in the Brazilian economy.

Consequently, the increase in the Selic Rate affects the demand for products.

This is because when the basic interest rate increases, access to money becomes less. For this reason, people start to consume less.

When the Central Bank wants to stimulate the economy, that is, make money circulate more, it reduces the Selic rate.

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What is the relationship between inflation and investments?

Now that you know what inflation is, it's time to understand how it affects your investments. Take a look:

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Selic rate and savings

A savings are affected by the increase in the Selic rate.

In 2021, the government established a calculation that works as follows: 

If the Selic rate is greater than 8.5% per year, savings will have a yield of 0.5% per year + the TR.

If the Selic rate is below 8.5% per year, savings will have a yield equivalent to 70% of the Selic rate in that period.

Currently, the Selic rate is at 9.25%. In other words, the savings yield is 0.5%. This is equivalent to 6.17% per year.

For this reason, leaving money in savings is not a good deal. In fact, the higher the Selic rate, the greater this disadvantage will be.

This means that if you really want to earn returns that exceed inflation, you should look for other types of investment. fixed income investment.

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Selic rate and CDI

The variation in the Selic rate affects another economic index: the CDI.

The CDI (Interbank Deposit Certificate) It is the name of the loans that banks make to each other to close the day with a positive cash flow.

Like any loan, it charges interest (called the DI rate).

The DI generally follows the Selic. In other words, when the basic interest rate rises, the CDI rate also increases.

The values of the two rates are very similar. But generally, the CDI value is a little lower.

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Selic and inflation: how does this impact fixed income?

Now you know the relationship between the Selic Rate and inflation.

And fixed income investments are affected by the relationship between Selic and inflation.

The thing is that these investments have their profitability affected by indexes. In other words, if an index goes up or down, the profitability also fluctuates.

With the Selic rate and inflation on the rise, investors are beginning to be more interested in fixed income assets, whether prefixed or post-fixed, as these investments yield based on the Selic rate and the inflation rate (IPCA).

Conclusion

As you can see, inflation not only causes your purchasing power to decrease, but it can also affect your income.

If you want to protect your capital, it is essential to know the investment options that outperform inflation!