As the sun dipped below the horizon, casting a warm glow over the quiet valley, Ada watched her parents and grandparents diligently tending their fields. She appreciated their attention, dedication and patience, realizing that, like growing a healthy crop, financial success required rhythmic discipline, long-term planning and anticipation of unforeseen events.

Eager to learn more and more, she looked forward to her friends.

Ada: Tell me what you know about inflation. I have been hearing this term on the news recently, over and over again. Lately, my mother has been getting more and more agitated and always says that we don't have enough money for food and household maintenance.

Daniel: I learned in school that inflation is characterized by an increase in the general level of prices of goods and services in circulation.

George: That's why inflation causes people's purchasing power to fall with the same unit of currency. In other words, inflation is a situation where our money doesn't buy as much as it used to because services and products now cost more.

Rareș: Aham... I heard my parents and grandparents talking recently about how milk and bread used to cost a lot less before. I guess that must be inflation. Right?

George: Yep. Let me give a more concrete example. In the year 2000, an audience member could buy a movie ticket for about 13-15 lei. Today, the average cost of a movie ticket is about 20-25 lei. In conclusion, 3 years ago, a person could buy two tickets for 30 lei, but today, with the same 30 lei, he can buy only one ticket. We can say that the currency has less value now than before, because of inflation.

Ana: However, why should we load our brains with such hard-to-understand terms?

Ada: It's just as complicated for me to understand, Ana, but I try to keep up with the boys. I hope that by exploring this topic we will be able to find out why our parents and grandparents find it hard to cope with current expenses at certain times.

Daniel: Yeah... inflation has an effect throughout the economy. Some people must limit the amount of luxury items they buy on a regular basis, while other people have to be able to cover the costs of everyday necessities like food and home maintenance, maybe even rent.

Ada: I understand, contextually, that businesses are selling fewer products, and the economy in general is suffering.

George: Exactly! I suggest we do an exercise in imagination. Suppose that over the next 10 years the prices of the products we buy double. If our parents' income also doubled, they would buy: A. Less than they buy now? B. The same as they buy now? C. More than they buy now?

Ada: It's like you're setting us up. I'm also afraid to answer, lest I get it wrong.

Daniel: Well, what do you think, are you getting a bad grade? I think we should ask each other questions like this more often. Answers may vary but the correct answer is ˝doubling our income will allow us to maintain our current standard of living even if the prices of the goods we buy double˝.

George: If I may, I challenge you again on this topic. Imagine that the interest rate on your family's savings account is 1% per year, and the inflation rate is 2% per year. After one year, with the money in your account your parents will be able to buy A. More than today, B. Exactly the same as today, or C. Less than today?

Daniel: First of all, the 2% inflation rate is higher than the 1% interest rate on personal savings, which means that those who saved money have lost purchasing power due to inflation. I think the correct answer is ˝less˝.

George: My mother showed me a practical way to understand inflation. Saving money is like taking a step forward from point A (where I am now financially) to point B (where I want to be). And inflation is like taking a step backwards. She also submitted to me that inflation increases the price of goods and services and erodes the interest earned on savings and investments, especially low interest accounts.

Rare: I've also heard the term deflation, which seems to be the opposite of inflation and can be just as dangerous in a given context.

Ada: What is deflation?

George: Deflation is an economic phenomenon characterised, this time, by a general fall in the prices of goods and services.

Daniel: In other words, deflation can significantly influence the national economy as well as inflation, because prices are low and money has a high value.

Ada: I don't get it! Why would it be bad if prices are falling and money has a high value? That should be very good, especially for us.

Rareș: I'll give you an example. In the case of food for daily living, deflation can cause prices to fall steadily and continuously, most often on food. While it may seem beneficial initially, persistent deflation can hurt farmers, ranchers and traders, because they will see their profits fall and they will have real difficulties maintaining their businesses.

George: Let's say a shop sells a toy for 15 lei, but nobody buys it. Hoping it will sell, the retailer reacts by lowering the price to 10 lei. This makes people expect the price to keep going down, so they stay and wait. Wanting to recoup at least some of the losses, the trader drops the price further, to 7.50 lei, which is half the original price. So the customers' money is worth twice as much as before. That's why this phenomenon is called deflation.

Daniel: At first, deflation may not sound as bad, Ada, as you say. Money that has a high value is good, isn't it? But if people know that prices will fall, the common belief is that they won't spend any money at all in the hope that prices will fall further. Lower prices are good for customers, but bad for entrepreneurs and retailers.

George: Yes, in a deflationary environment, our parents, grandparents and friends choose to avoid spending because they expect prices to fall further, which can lead to a fall in demand and as such, stagnation in the economy.

Ana: It's a bit like the economic situation in the pandemic when people stopped buying products.

Ada: Yes, except that back then, my mum and dad actually saved money, which they then spent, unfortunately.

Rareș: Check this out, I just looked online and it says that deflation can also foster unemployment, because it often leads to less investment in the economy. Because of low profits or losses, some entrepreneurs have to reduce production, ˝freeze˝ current wages or reduce them, or lay off their employees and even go bankrupt.

Daniel: That means, not only can employees lose their jobs, but they may have real difficulty finding new employment because of the uncertain economic environment.

Rareș: In short, deflation means that money is worth more, but there is less of it because of the lack of spending, low wages and high unemployment.

George: I've always been curious about how the economy and money have shaped our society. I've learned a lot today. Thank you!

Daniel: I have an idea! Since we love to document so much, how about telling others about what we learn? It could be a good opportunity to raise the level of financial literacy and financial education in our community. It would feel great to know that we have contributed to the well-being of the young people in the village.

DIARY PAGE | Your and your family's purchasing power

Think about your parents and look back at their behaviour when faced with the fact that products they normally buy suddenly become more expensive. What is their first impulse? What do they buy? In a crisis situation (e.g. in the COVID pandemic), how much of a necessity did your parents buy?

To deepen the subject:

Watch the video ˝Explaining inflation˝.

Respond to these questions: How might the general price of food change and what might happen to your family's purchasing power in a similar situation?

Regarding inflation, what are the positive aspects of your own finances, your family and the economy? What about the negative ones?

Did you know that...

Purchasing power is the value of a currency expressed in terms of the number of goods or services a unit of money can buy.

Rule 72 is an empirical way we can use to calculate how quickly our money loses value if it is not invested and protected from inflation. Suppose the annual inflation rate is 4.24%. We divide 72 by the annual inflation rate (72 : 4.24 = 17 years) and the result roughly estimates in how many years prices double if the annual inflation of 4.24% remains constant. In other words, the formula roughly tells us the number of years in which money will lose half its current value.

Mismanagement of the economy can often lead to higher inflation.

From all appearances, the COVID-19 pandemic will influence inflation for years to come.

Following significant deflation in the 1990s, Japan suffered a 10-year recession known as the "lost decade".

The Great Economic Depression of the 1930s seems to have been largely influenced by the deflationary phenomenon that existed at the time.

Inflation is a method of counteracting periods of deflation, which central banks sometimes use to balance the economy.