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Inflation

Updated on May 18, 2019 , 1022 views

What is Inflation?

Inflation is the long-term rise in the prices of goods and services caused by the devaluation of currency. Inflationary problems arise when we experience unexpected inflation which is not adequately matched by a rise in people’s incomes. The idea behind inflation being a force for good in the economy is that a manageable enough rate can spur economic growth without devaluing the currency so much that it becomes nearly worthless. Central banks attempt to limit inflation — and avoid deflation — in order to keep the economy running smoothly.

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. If incomes do not increase along with the prices of goods, everyone’s purchasing power has been effectively reduced, which can in turn lead to a slowing or stagnant economy.

Types of Inflation

1. Demand-Pull Inflation

Demand pull inflation occurs when aggregate demand is growing at an unsustainable rate leading to increased pressure on scarce resources and a positive output gap. Demand-pull inflation becomes a threat when an economy has experienced a boom with Gross Domestic Product (GDP) rising faster than the long-run trend growth of potential GDP

2. Cost-push Inflation

Cost-push inflation occurs when firms respond to rising costs by increasing prices in order to protect their profit margins.

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Causes of Inflation

There is not a single, agreed-upon answer, but there are a variety of theories, all of which play some role in inflation:

Causes of Demand-Pull Inflation

  • A depreciation of the exchange rate

  • Higher demand from a fiscal stimulus

  • Monetary stimulus to the economy

  • Fast growth in other countries

    Causes of Cost-push Inflation

  • An increase in the prices of raw materials and other components

  • Rising labour cost

  • Expectations of inflation

  • Higher indirect taxes

  • A fall in the exchange rate

  • Monopoly employers/profit-push inflation

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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