Most people around Latin America and the Caribbean will be aware of the state of the current global economy. It has not always been plain sailing for many countries worldwide economically as of late and inflation is often mentioned as being a major part of this.

Although it is easy to skip over this term when we hear it, understanding inflation and what economic factors influence it is crucial for everyone. This is because inflation has a direct impact on our daily lives, how much things cost and how much the money in our pocket is worth.

Understanding inflation rates is not just something that is important for general life. Investors should also have a grasp of how inflation affects their portfolio or how it can impact their trading decisions. Business owners within Latin America and the Caribbean should also understand what inflation refers to and how it can impact their company.

But what is inflation and what economic factors have an impact on it?

What is inflation?

Inflation refers to the rise in value of goods and services within an economy. Due to this, inflation results in the money in your pocket becoming less valuable and means you do not get as much for it as in the past.

But how does inflation actually do this? When prices rise in general within an economy, each unit of currency is able to buy less and is therefore worth less than it was before. This correlates to a decline in the value of the currency overall and a decline in purchasing power for citizens. Inflation can be dangerous for investors because it eats into their potential returns over time on certain assets. For business owners, high inflation can lead to people being less able to afford their goods/services or experiencing a rise in operating costs.

2% inflation rate usually targeted by governments

As inflation can be a dangerous thing when left to grow unchecked, all world governments pay great attention to levels of inflation in their own economies. This has led many governments to target a 2% rate of inflation.

To keep a handle on inflation levels, national governments need to understand what factors in the economy influence it. This is also something that is key to understand in daily life and certainly for investors who may have assets which are sensitive to inflation.

It is also important for business owners in the Pan American region to develop an understanding of. While knowing about the current trends in Latin American startups is essential, having a firm grasp of how inflation might impact your company is also crucial.

But what economic factors have the most impact?

1. Demand-pull inflation

This is one economic factor which can have a big effect on inflation in general. This happens when people want to buy goods/services at a quicker rate than they can be produced. In this instance, demand outstrips supply and causes prices to rise.

Rising prices lead to people being able to buy less with their money and results in inflation rates skyrocketing. This economic factor may lead to inflation affecting multiple markets and having an effect economically across the whole country.

2. Cost-push inflation

This is another economic factor which can lead to rising inflation levels. It occurs when the producer/seller of goods or services experiences an increase in their own costs. If they then pass this on to the consumer, it leads to things becoming more expensive and inflation starting to rise. As noted above, goods and services becoming more expensive reduces purchasing power and can cause inflation to shoot up quickly.

3. Supply of money increased

This is classic factor which can have an influence on inflation and led to hyper-inflation in 1920’s Germany. In essence, it relates to the central bank in a country circulating too much money in the local economy.

This increased supply may not keep up with the speed that products are being manufactured and lead to supply issues. The danger here is that a limited supply of products will cause prices to rise and result in inflation. An excess of unspent money can also be an issue in economic terms nationally and cause inflation to rise.

4. Increase in wages

There is no doubt that increased wages benefit employees and give them more money to spend. Despite this though, this is a factor which can lead to higher inflation levels. This happens because the cost of paying staff more is passed on to consumers by companies. As a result, prices can rocket over time and lead to people being able to buy less with the money they have.

Inflation impacted by various economic factors

As the above shows, inflation is important to know about for daily life, as a business owner or as an investor around Latin America and the Caribbean. It is also influenced by a number of economic factors. Key to understanding inflation is knowing what these factors are and how they can cause it to rise.