Inflation
March 23, 2009
Definition of Inflation
Inflation can be viewed from different perspectives. Inflation is simply the state of being inflated or the act of inflating. It can be described as the rise in the general level of the prices of goods and services in an economy over an extended period of time. Inflation simply refers to the increase of growth in money supply.
On the other hand, it can be described as the decline in the real monetary value in an economy; the loss of purchasing power of money which is the basis medium of exchange. In other words, it is a condition characterized by increase in wages and prices and a decline in purchasing power.
Inflation Rate
According to economists, inflation rate is a measure of inflation, the rate at which a price index grows. It is the percentage rate of price change over a given period of time. The decreasing rate of the purchasing power of money is approximately equivalent.
Measuring Inflation
Inflation is normally measured using the Consumer Price Index (CPI), which gauges the prices of certain goods and services purchased by a normal consumer. Inflation can also be measured by the GDP deflator, which basically measures the price alterations in goods produced locally. As a result, inflation diminishes the purchasing power, thus making it expensive to buy goods or services.
Causes of Inflation
There are several causes of inflation; the following are just a few.
- The first cause of inflation is money supply. It is believed that if the Federal Reserve does not control money supply efficiently, it may rise at a rate that will out pace its potential economic output.
- On the other hand, low interest rates go hand in hand with high money supply levels, therefore allowing for huge investments, which will lead to indefensible inflation levels given that cheap money will be easily available.
- If the economy’s demand of goods and services is higher than the supply, it causes the suppliers to raise prices until the time demand-supply equilibrium will reached.
- “Supply shock inflation” is another probable cause of inflation. When there are probable shortages in available supplies of goods or services, it causes an outright wave effect on the economy by raising prices on the supply chains directly from the producer down to end users.
Consequences of Inflation
The economy, social conditions, moral lives and the politics of a country are affected by inflation. Following are a few of the effects of inflation.
- first of all, elderly people on a fixed income seeking to retire will be affected by inflation since their money’s worth will diminish as the time goes by and as inflation continue to go north.
- Still on point, high inflation means that the purchasing power will be redistributed from fixed income earners e.g. pensioners to those with variable incomes with the hope that their income will keep pace with inflation. Redistribution of purchasing power will also affect international traders. In instances where fixed exchange rates are imposed, an economy experiencing high inflation will escalate the price of its exports thus affecting the trade balance.
- Of course the purchasing power of money will depreciate. Inflation hugely and widely influences the investments of a country
That said, monetary authorities ought to control the size of money supply by setting the interest rates and standardizing bank reserve requirements. If inflation is not restricted at an early level, and left to rise to indefensible rates, it will impact strongly on the economy. This is in light to a common saying that “the bigger they are, the harder and tougher they fall”.
Comments
Got something to say?
Sign up to receive the latest breaking news!
