How can inflation affect currencies? It is a question that everyone asks. But, especially when the economy is so dynamic and more and more investment methods are being sought, we can take advantage of it without affecting our money.


What effects does inflation have on a currency?


The fact that the inflation rate rises means a mismatch between the demand and the supply of goods in a particular zone, which in this case would be the eurozone. There would be more demand than supply. The fact that there is more demand or less demand will depend on the credit facilities in the economy, that is, on whether the banks open the “tap” more or less. Money is created by banks every time they grant credit. And it comes out of nowhere because they only have to have a fraction in their reserves of the loan they issue. Bills and coins are only physical support for money. Still, there is more, such as accounting entries in current accounts, savings books, etc.


Banks open their hands more or less according to the directing rates set by the Central Bank. If rates rise, fewer loans are granted, and less money is created. Well, money in itself is nothing. It is a debt guaranteeing the goods and services produced in the economic area to which said money belongs. The guarantee of the euro is the goods and services produced in the eurozone. Suppose the money in circulation in euros increases and the supply of goods and services does not increase. In that case, this guarantee will dilute a more excellent money supply. This causes the currency to lose value since the economic warranty is less.

The INFLATION differential.


If a country has higher prices for the same product than another, it is losing competitiveness. Therefore, exports will fall, and the reduction in relative costs of foreign goods will increase imports.



Why hasn’t inflation skyrocketed yet?

Suppose, despite the measures of the central banks and the Federal Reserve, inflation remains contained. In that case, the new liquid balances created do not reach the public. For inflation to increase, the money supply and the velocity of money must increase, which is what we economists call the frequency with which money changes hands.


Right now, the money does not move: from the central bank to the banks’ balance sheets to cover holes. In addition, now the banks have the business of borrowing from the ECB at a ridiculous interest rate and, with that money buying public debt with higher interest rates. Then the credit does not reach the ordinary citizen.


Another reason why inflation has not spiked is that inflation expectations remain contained. Therefore, the best way to act on inflation is to contain its expectations because once it breaks out, it is difficult to stop.


Learn more about currency movement here.


And if you want to know the procedure to change your money, you can find out here.