Inflation
From Wikipedia, a free encyclopedia written in simple English for easy reading.
When economists talk about inflation they mean that the level of the prices will go up. A loaf of bread will be more expensive than it was before. This is also true for the jug of water, and for getting a haircut at the hairdresser's. People in economics call those kinds of things goods and services. A loaf of bread is a good, getting a haircut is a service. So inflation means that more money will need to be paid for the same goods and services. Inflation is measured each year, and the inflation rate is one of the most important indicators of the state an economy is in. A high inflation means trouble. If inflation goes the other way (you get more bread for your money), it is called deflation.There are also other kind of inflation like hyperinflation and stagflation.
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[edit] Causes of inflation
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There is no one cause that's agreed upon by everyone, but there are at least two Neo-Keynesian theories generally accepted:
[edit] Demand-Pull inflation
The Demand-Pull inflation theory can be summarized as "too much money chasing too few goods." In other words, if demand is growing faster than supply, then prices will increase. This usually occurs in growing economies.
[edit] Cost-Push inflation
The Cost-Push inflation theory says that when companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.
[edit] Costs of inflation
Almost everyone thinks inflation is evil, but it is not necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is expected or not. If the inflation rate is equal to what most people are expecting (anticipated inflation), then we can adjust and the cost is not high. For example, banks can change their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up.
Problems arise when there is unanticipated inflation:
- Creditors lose and debtors gain if the lender does not guess inflation correctly. For those who borrow, this is similar to getting an interest-free loan.
- Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.
- People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
- The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more have to be updated.
- If the inflation rate is greater than that of other countries, domestic products become less competitive.
People like to complain about prices going up, but they often ignore the fact that wages should be rising as well. The question should not be whether inflation is rising, but whether it's rising at a quicker pace than your wages.
Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it's not so easy to label inflation as either good or bad -- it depends on the overall economy as well as your personal situation.
