When a government increases the amount of money in circulation (inflation), the value of the money declines (devaluation). Bloomberg reported today that the “inflation rate” in Britain rose to 5.2%, it’s highest level since 1997. This means the British pound was devalued by 5.2%. Hypothetically, if one needed to trade 100 pence for a cup of coffee, now one needs to trade 105 pence. Everyone who owns British pounds, lost 5% of their wealth during the past year.
The news is actually worse. The inflation numbers reported by most media organizations refer to price rises. The real definition of inflation refers to an increase in the money supply. This sounds like a good thing, but imagine if you collected diamonds and someone found a billion of them. Your diamonds would be worth a lot less. Similarly, when the government and the banks create more dollars, your dollars are worth less.