Rising Prices (Inflation)

Inflation refers to a systematic increase in prices of goods and services over time. There are many causes of inflation, and generally, inflation is regarded as inevitable for any economy. It has a bad impact on the buying power of people. Consumers buy less for the same amount of money than they had previously. Therefore, the rate of inflation also represents devaluation of a nation’s currency. The opposite of inflation is deflation, which means a continued decrease in the prices of goods and services. The inflation rate is calculated annually from the changes in the consumer price index.

 

Two of the most common causes of inflation are demand-pull inflation and cost-push inflation. Demand-pull inflation represents an increase in prices due to an unprecedented increase in demand, due to a shortage of supply. In other words, when there is demand-pull inflation in the economy, it means that there is too much money to buy too few goods. Cost-push inflation refers to an increase in the costs of production, such as the prices of raw material or labour. Cost-push inflation is usually problematic since it causes a decline in economic growth, leading to lower living standards.

 

As a certain level of inflation in an economy is inevitable, a low inflation rate is not viewed as a cause of concern. However, a high inflation rate is problematic and there are many fiscal and monetary measures that a government can take to avoid high rates of inflation. The most harmful type of inflation is hyperinflation, where prices rise by more than fifty per cent in one month. The occurrence of hyperinflation is rare, however, and only happens in periods of excessive growth in the money supply. Another problematic type of inflation is stagflation, where prices rise continuously but demand in the economy is low due to high rates of unemployment.

 

There are a number of ways to control high rates of inflation. Some of the strategies governments undertake to combat high inflation rates involve increasing or decreasing the interest rates, printing more money, establishing and promoting production in an economy, increasing or decreasing government expenditure, lowering or increasing tax rates, controlling the foreign reserve of currency, devaluing or appreciating the exchange rate of its currency, and establishing wage controls.

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