Inflation represents a change in a country’s economy and influences decisions on consumption, saving, and investing. In Mexico, this phenomenon typically appears every year, impacting businesses, governments, and citizens alike.

That’s why it’s crucial to understand what inflation is, the types that exist, and why it occurs. Beyond answering those questions, this post reveals how inflation is calculated and offers tips on mitigating its impact.

Inflation: Definition, Causes, Types, and Effects on Your Wallet

What Is Inflation?

It’s an economic phenomenon characterized by a constant increase in the prices of goods and services. This covers everything we use or buy—such as food, clothing, or transportation.

This rise is steady and widespread over a period of time, thereby reducing the real value of money.

Examples of Inflation:

1. Suppose you go to a store today, buy some products for a certain amount of money, and then return a few weeks later planning to purchase exactly the same items. You realize your money now buys you less.

2. A simpler illustration: you pay for a kilo of Product X at 5 pesos, and the next day that same kilo costs 10 pesos.

Both examples illustrate inflation, as products become more expensive over short intervals.

What Types of Inflation Exist?

Inflation can be classified in various ways, depending on its intensity, causes, or underlying factors.

Let’s look at the most common types of inflation:

Moderate Inflation

Prices rise gradually and remain manageable, so the purchasing power isn’t severely hit. The rate typically doesn’t exceed 10% a year.

Galloping Inflation

Prices climb very quickly in a short span, making it harder for businesses and citizens to plan financially. The annual rise can reach two or three digits.

Hyperinflation

An extreme scenario in which prices soar uncontrollably, causing the local currency’s value to plummet almost entirely and triggering a nationwide crisis. Price jumps here are in the 4-digit range (1,000% a year or more).

Demand-Pull Inflation

Arises when there’s more money circulating in the economy plus a high demand for goods and services, causing prices to increase.

Cost-Push Inflation

Occurs when production costs (raw materials, wages) climb, forcing businesses to hike final prices on their products/services.

Structural Inflation

Stems from ongoing issues in a country’s economic structure, for instance uneven markets or poor infrastructure.

Core Inflation

Focuses on capturing long-term pricing trends by excluding volatile elements like food and energy prices.

Aside from these common types, there are related economic phenomena worth mentioning:

• Stagflation: One of the worst economic scenarios—high inflation coexisting with economic stagnation and high unemployment.

• Disinflation: A slowdown in the inflation rate, meaning prices continue rising but at a slower pace.

• Deflation: The opposite of inflation—when goods and services become generally cheaper over a prolonged period.

These examples reflect economic dynamics that can influence both political and financial strategies.

Causes That Trigger Inflation

Inflation can arise from various factors, both economic and structural, each with a distinct effect on price movements.

Here are some causes of inflation:

• Demand exceeds supply. If more people want to buy goods and services than the market can provide, prices tend to go up.

• Cost increases. If it becomes more expensive for companies to produce something, they pass that cost on to consumers.

• Rise in the money supply. If there’s too much money in circulation, its value diminishes, prompting a price surge.

• Inflationary expectations. When people or businesses anticipate prices will climb, they alter their behavior, potentially accelerating price hikes.

These inflationary causes can act independently or in tandem, depending on economic conditions.

How to Measure and Calculate Inflation

Inflation is measured using the INPC (National Consumer Price Index)—the key indicator reflecting the average price variations of a basket of goods and services that represent national consumption patterns.

This process is carried out by INEGI (National Institute of Statistics and Geography), which also publishes the data every two weeks and monthly.

How is inflation calculated?

Inflation is determined via a formula:

(INPC final − INPC inicial) / INPC inicial × 100

Where:

• INPC final is the index in the period you’re analyzing to find the inflation rate.

• INPC inicial is the index in your reference period (month/year) for comparison.

Using this formula yields the percentage change in prices over two points in time.

How Does Inflation Affect a Country’s Economy?

This phenomenon brings major changes to an economy, touching citizens and markets alike.

Key impacts of inflation include:

• Higher cost of living: Goods and services become pricier, reducing people’s purchasing power.

• Currency devaluation: The local currency loses value, influencing exchange rates and intensifying devaluation tendencies.

• Less investment appeal: Investors may prefer more stable markets elsewhere.

• Wage adjustments: Governments might raise minimum wages to mitigate the effect on citizens.

However, if inflation is well controlled, it can ease debt burdens, encourage spending, and reflect a healthy level of economic activity.

Inflation’s Impact on Your Personal Finances (Saving and Investing)

Inflation erodes money’s value, meaning essential goods like food and transportation become more expensive, forcing you to spend more to buy the same items.

It also directly affects the value of your savings and investments: as prices go up, any money you hold loses purchasing power.

For instance, if you’ve parked funds in a bank that pays interest rates below the inflation rate, your savings effectively lose value over time.

Your real return on investments also decreases if their growth doesn’t keep pace with inflation, cutting into your net gains.

How Can I Protect Myself from Inflation?

According to Statista, inflation in Mexico is on a downward trend and is expected to keep declining in the coming years.

Still, you can take steps to minimize inflation’s effects and safeguard your savings:

• Create a budget that covers necessary expenses and stick to it, prioritizing essentials and cutting superfluous costs.

• Build an emergency fund to cover at least 3–6 months of basic expenses.

• Diversify your investments in various financial instruments and markets to balance risk and maximize growth.

• Invest in tangible assets like real estate, which often retain value in inflationary environments.

• Choose financial products with yields that surpass inflation, such as competitively paying accounts or time deposits, preserving and growing your money’s worth.

Another effective avenue is to choose DolarApp, which can shield your money from a possible depreciation of the peso.

Why Consider DolarApp?

Because it lets you open a digital dollar account, preventing your savings from losing purchasing power in local currency. Plus, you can do everything from your phone, including currency conversions at a fair exchange rate.