The world of finance can seem pretty intimidating and is something a lot of people don’t know enough about, but economics mostly reflects common sense, so understanding it may not be as hard as you think.
Giles outlined the essence of inflation… “Inflation refers to a general increase in the price of goods and services in the economy, over time, that effectively decreases the value of money because you can buy fewer items with the same amount of cash. The opposite of this is deflation, where prices are falling. Countries aim for an average rising inflation of about 2%.” He went on to discuss this in more detail and the thought process behind the benefits of a 2% increase in inflation, “my mother is installing solar panels on her roof. If she thought that the price of electricity was going to fall each year for the foreseeable future she might not bother. As a result, her cash would just sit in the bank being relatively unproductive.” The overall problem with inflation is that you can have the same amount of money but it will eventually get you less and less as prices start to rise.
The discussion moved to savings, shares and government bonds. Garry stated that “Bonds are safer than shares, but they offer a lower return. As a result, when equities are rising in a bull market, volumes fall and vice versa. Equities do well when the economy is booming.” Bonds and equities were later discussed in more detail, and Garry concluded by saying that “Equities are the riskier asset class because you risk losing all of your capital. However, they demonstrate superior returns, and the ability to beat inflation over the longer term.”