According to the author Joyce hart who wrote the book, “How Inflation Works”, “Inflation refers to a continuing rise in the general price level of goods and services.” If you are not an economist or business-related person, you cannot easily grasp the whole idea. You still tend to ask yourself, “What is inflation?”. By definition, inflation prompts business owners to increase the price of food higher than the previous years. The value of your money or items that you bought changes over time, and may actually cost more depending on the inflation rate.
What is good about inflation?
Once you have defined what inflation is, you can hopefully understand why inflation is also good. Inflation is positive in the sense that business owners reap their profits and can be reinvested to other businesses. It helps the economy because it allows more investors. Also, if business owners earn more profit due to inflation, employees will experience the same thing in the form of a salary raise.
A salary raise due to inflation could mean being able to afford a brand new car, investing in a property, being able to buy a new computer and the likes. What is good about inflation? It brings more money for the business owners, employees and gives power to investors to invest more.
What happens if inflation becomes uncontrolled?
You must be wondering what is inflation when it becomes uncontrolled? If inflation becomes uncontrolled, the economy will suffer. For instance, if prices of goods will continue to go up and employee salaries remain stagnant, people cannot afford to fend for themselves anymore. It should be balanced that when inflation goes up, earnings must also keep up. Otherwise, inflation brings a negative effect on everyone.
What are the causes of inflation?
Hamed Mokhtar, Managing Director of Fortress Investments from UAE explained that there are three causes of inflation.
The first one is called demand-pull inflation. This can be identified when there is an increase in the demand for goods or services but the supplies fall short or remains the same. The second cause of inflation is called cost-push inflation. This is indicated by a limited supply of goods or services while the demand remains the same. In the US, this became a cause of income inequality where prices of goods and services increase while salaries remain the same. The standard of living continues to decrease in this kind of scenario. Lastly, inflation occurs when there is an overspending of money. This result to liquidity such as credit.
What is inflation targeting?
During the late 1980s, the New Zealand government directed their Reserve Bank to keep inflation low and stable. This resulted in an agreement where reduction of inflation will be implemented in 0-2 percent increase in the Consumer Price Index of 1992. Therefore, inflation in New Zealand was kept at 1-3 percent per year. This was quite low as compared to the inflation rate in New Zealand between 1960s and 1970s which climbed up to 18 percent.
What is inflation measurement?
According to an article by BBC, the Office for National Statistics (ONS) gathers prices of over 100,000 products and services from stores across the UK. These are used to monitor prices by comparing the retail price of similar goods. These are computed to get the average household expenditure or overall prices index. Based on statistics, UK consumers spend more on petrol and diesel thus, inflation rate is higher for these types of product. Another measure of inflation is known as HICP or the harmonized index of consumer prices. This assesses the same thing as consumer price index or CPI. The HICP usually focuses on monitoring prices in the EU area. It can also be a point of comparison for inflation rate between countries.
Throughout the years, governments of many countries have tried to provide a solution to inflation. However, economic activities vary from time to time. Expect inflation when bank interests go up as this will surely affect economic activity. There is definitely low economic activity when investments are withheld. When investments are high, there is an economic boom.