What is Inflation | Causes of inflation | Inflation good or bad

What is Inflation?

Definition – Inflation is used to define the process by which prices of goods and services increase constantly with time, it is the reason why purchasing power of currency decreases with time.

You can calculate the rate using an inflation calculator.

Central banks all over the world try to control this process in their respective county, 2% – 3% of annual inflation rate is considered to be normal neither more nor less.

Let us under inflation with a simple example,

During, 1970 a cinema ticket would cost you about 25p but now it costs you around 30 pounds. This rise in price is caused due to inflation.

A yearly income of $15000 dollars in 1850 would be considered to be great and he or she would be considered to extremely rich, but now this is far less than an average yearly income of a US citizen, all this has occurred due to inflation.

 How government measures and controls inflation?

inflation historic data

Central banks all over the world use very specific data from their current market to understand the state of inflation

in their country. Industries like food, energy which are very volatile industries are excluded. Government always focus on long-term inflation goals.

There are mainly three types of Inflation:

  1. Cost-push.
  2. Demand-pull.
  3. Monetary.

Cost-Push Inflation

This occurs due to the increase in the cost of business due to several reasons like to increase in labor, increase in raw material etc. This rise in prices directly affects its customers. Costs of product and services are increased just to match the demand and supply.

Demand-Pull Inflation

This occurs when the demand for certain goods or services increases due to several reasons but at the same time the market is not capable to meet those demands, this causes the price to rise so that fewer people chase that exact same thing that particular time.

Monetary Inflation

This is caused when the government starts to print more money than what is actually hence more cash starts to circulate in the economy. After some time, this leads to decrease in the purchasing power of the money. This is the most common form of inflation and happens all the time.

How does inflation affect the economy?

inflation rates

In all the above cases one of these things is going to take place:
1.Too many people will start chasing the same product or service, hence there will be a shortage.
2.Too many notes will start chasing the same product or service, hence there will be an unnecessary and temporary shortage of that particular thing.

It increases interest rates.

What this means is that this causes a rise in prices and creates a disbalance in the demand and supply cycle.

Is inflation is good or bad?

It is good and also bad, depends on the situation of an individual.

Good – People who are taking loans, mortgages etc (not specifically from banks), they have to pay the exact same interest even after the real value of the currency decreases at that particular time.
Government too benefits from this, the government generally have huge debts on them which get reduced in terms of the real value.
The normal inflation rate is a clear indication that the economy is rising.

Bad – People who have savings are the ones that get hit the hardest simply because of the real value decreases.
Vice versa of the above points.

What is Hyperinflation?

inflation good or bad

This is caused when the inflation rates in a country increase exponentially and in unusual rates. Usually, this occurs due to an unrestrained printing of fiat currency. This can lead to decrease in the value of $1million dollars to $10 dollars overnight.

Some historic examples include Hyperinflation of Weimar Germany and the more recent Zimbabwean Hyperinflation which reached 2.2 Million Percent.

 

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