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 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.
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
Cost-push inflation occurs when firms respond to rising costs by increasing prices in order to protect their profit margins.
Talk to our investment specialist
There is not a single, agreed-upon answer, but there are a variety of theories, all of which play some role in inflation:
A depreciation of the exchange rate
Higher demand from a fiscal stimulus
Monetary stimulus to the economy
Fast growth in other countries
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
You Might Also Like