We have noticed that the prices of things keep rising. A cup of coffee in 1970 cost just 0.75 Dollars. It costs more than 1.5 Dollars today. This is the result of inflation.
Inflation is a sustained increase in the average price level of goods and services in an economy over a period of time.
What Are The Effects Of Inflation?
The purchasing power of a currency unit decreases as the commodities and services have higher prices. When inflation is high, the cost of living gets higher as well.
What are the main causes of Inflation?
Based on causes, inflation is classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation.
Demand-pull inflation occurs when the overall demand for goods and services in an economy increases more rapidly than the economy’s production capacity. It creates a demand-supply gap with higher demand and lower supply, which results in higher prices. For instance, when the oil-producing nations decide to cut down on oil production, the supply diminishes. It leads to higher demand, which results in price rises and contributes to inflation.
Cost-push inflation is a result of the increase in the prices of production process inputs. Examples include an increase in labor costs to manufacture a good or offer a service or an increase in the cost of raw material. These developments lead to higher costs for the finished product or service and contribute to inflation.
As the price of goods and services rises, labor expects and demands more wages to maintain built-in inflation cost of living. Their increased wages result in higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa.
Is Inflation bad for everyone?
Inflation can be viewed positively or negatively depending on the individual’s perspective and rate of change. Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets. People holding cash may not like inflation, as it erodes the value of their cash holdings.
Ideally, an optimum level of inflation is required to promote spending to a certain extent instead of saving, thereby nurturing economic growth.