What is Inflation?

In terms of economics, inflation can simply be defined as an elevation in the general price levels of services and goods in the economy over a particular period of time. Whenever the price level increases it causes depletion in the buying capacity of the currency, so inflation can also be defined as erosion in the purchasing power of money i.e. a loss of the real value of money in an internal medium of the exchange. One most common measure of price inflation is inflation rate. Inflation rate can be calculated as the yearly percentage change in the general price index (Consumer Price Index to be used most commonly) over time.

Inflation and its effects
Inflation can produce many integrated and complex effects that simultaneously put negative as well as positive effects on the economy. A major negative effect of the inflation is depletion in the real value of the money and various other monetary entities over the time. Moreover, inflation generates uncertainty about the future; inflation will certainly discourage the saving and investment activities of the citizens. Under high inflation investors adopt reverse psychology i.e. they reduce the investments in the productive capital and increases the savings in various non-producing assets. For example, selling the stocks and purchasing gold. This is very detrimental for the growth of economy because it reduces overall economic productivity rates. High inflation rates will lead to the shortage of goods (if consumers got the feeling of insecurity about the prices). For example, recently, the government hinted that the sugar availability may decrease in the country, which might cause some increase in the prices of the sugar in the country. As a result, people started purchasing sugar in bulk, in order to maintain heavy stocks of sugar, with the expectation of selling that sugar in times of heavy demand and increased prices. But this is illegal because bulk stocking of such entities leads to their shortage in the country.

Inflation also produces some positive effects. Positive effects of inflation includes— mitigation of the economic recessions, debt relief (by decreasing the real level of the debt) etc.

Economists have a common opinion that the high rates of inflation and hyperinflation (sudden inflation) are caused by the excessive growth of the money supply in the country. Because when money supply increases in the economy it increases the purchasing powers of the citizens and, as a result, their disposable income increases. Due to the presence of high disposable incomes, citizens spend more on purchasing goods and services which causes shortages of those goods and services and their prices consequently increases. As a treatment, the government should try to keep the money supply at an optimum level; otherwise the government should provide better alternatives to the citizens, for example, saving schemes, investment options etc.

Today, most of the mainstream economists support a low and steady rate of inflation. Low inflation is better than zero or negative inflation, because it may contribute to decreasing the severity of the economic recessions.

Written by Lucas Beaumont

Generalist. Wikipedia contributor. Elementary school teacher from Saskatchewan, Canada.

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