Inflation

Inflations

A rise in the standard price of commodities and services across the economy is referred to as inflation. The main drivers of inflation are the growth in the money supply and the demand for goods and services. Inflation can benefit businesses, leading to increased product demand and higher profits. However, it can also be detrimental for consumers as it reduces their purchasing power and erodes the value of their savings. 

What is inflation? 

Inflation is the rate of price growth over a predetermined time period. A country’s cost of living or the overall increase in prices are two examples of broad metrics used to quantify inflation. However, for other things, like as food or services, it may also be calculated with greater accuracy. Inflation is the measure of how much the relevant group of goods and services have increased in price over a given period of time, usually a year. 

Understanding inflation 

The cost of living for consumers is influenced by the cost of living for households and the cost of various goods and services. Government organisations undertake home surveys to determine a basket of frequently purchased commodities and monitor the costs of buying this basket over time to calculate the typical consumer’s cost of living. (Housing costs, including rent and mortgage, make up the greatest portion of the American consumer basket.)  

The consumer price index (CPI), the most often used indicator of inflation, measures the cost of this basket at a particular moment relative to a base year. On the other hand, consumer price inflation measures the percentage variation in the CPI over a given period. 

The objective of measuring inflation is to determine the overall effect of price increases for various goods and services. It enables a single-valued presentation of the rise in the price of commodities and services over time in an economy. 

Causes of inflation 

There are many different causes of inflation, but the most common cause is simply an increase in the money supply. When the money supply grows too rapidly, it can lead to inflationary pressures in the economy. This can happen when the central bank prints too much money or commercial banks make too many loans. Other causes of inflation include increases in the cost of raw materials or government spending. 

Types of inflation 

There are generally four types of inflation: demand-pull inflation, cost-push inflation, built-in inflation, and imported inflation.  

• Demand-pull inflation 

It occurs whenever there is an increase in the demand for goods and services in an economy. This increase in demand can be due to several factors, such as population growth, government spending, or consumer confidence. When demand for goods and services increases, businesses will raise prices to meet this demand.   

• Cost-push inflation  

It occurs when the cost of production for goods and services rises. This can be due to increased raw materials, labour, or energy costs. Businesses will pass these costs on to consumers when production costs go up through higher prices.  

• Built-in inflation 

It is built into the price of goods and services over time. This type of inflation is often due to rise in the cost of living, such as higher housing costs, healthcare costs, or food costs. Businesses will boost prices to keep up with rising costs when living standards rise. 

• Imported inflation  

A rise in the valuation of imported goods and services causes it. This can happen due to many factors, such as a devaluation of the currency, an increase in import tariffs, or an increase in the price of oil. When imported goods and services increase, businesses will pass these costs on to consumers through higher prices. 

Pros and cons of inflation 

Some of the advantages of inflation are: 

• People who own physical assets (like real estate or stockpiled commodities) that are valued in their native currency might prefer mild inflation since it will increase the value of their possessions, which they can then sell for more money. 
• Due to the expectation of higher returns than inflation, firms and individual investors frequently speculate on hazardous business ventures due to inflation. 

There are several potential drawbacks associated with inflation.  

• First and foremost, it can lead to higher prices for goods and services, which can be a major burden for consumers, especially those on fixed incomes.  

• Additionally, inflation can erode the value of savings and investments and reduce purchasing power. This can be a problem for seniors and retirees who rely on their savings to cover basic living expenses.  
• Finally, inflation can create uncertainty and instability in the economy, leading to slower economic growth. 

Frequently Asked Questions