Inflation is defined as the sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer buys fewer goods and services. Accordingly, inflation reflects a drop in the purchase power per unit of money, a loss of real value in the medium of exchange and unit of account within the economy. A major measure of price inflation is the inflation rate, the annualised percentage change in a general consumer price index over time.
The effects of inflation on an economy are various and can be instantaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty …show more content…
It occurs whenever businesses in general decide to boost their prices to increase their profit margins. This does not occur normally in recessions, but when the economy is booming and sales are strong. It might be call oligopolistic inflation because it is oligopolies that have the power to set their own prices and raise them when they decide the time is right. One can at such times read in the newspaper that business is just waiting a bit to see how soon they might raise prices. An oligopolistic firm often realises that if that if it raises prices, the other major firms in the industry will likely see it as a good to widen their profit margins too without suffering much from the few other firms in the industry
The term implies whenever any of the other three factors hits a basic industry causing inflation there and since the industry hit is a major supplier of many other industries, as for example steel is or oil is, that raises costs of the industries using say steel or oil and forces up prices there also, so inflation becomes more widespread throughout the economy, although it originated in just one basic sector.
Effects of inflation on …show more content…
This consumer spending heats up the economy even more, leading to an increased inflation. Such situation is known as spirals out of control.
Different kinds of inflation
There are many different types of inflation. Most individuals are aware of core or commodity inflation, which tracts changes in consumer goods, gas and other commonly purchased items. Monetary and fiscal inflation are not the same thing.
• Wage inflation
Affects consumers directly. Wage inflation is also referred to as wage push inflation, it occurs when wages are increased and the price of goods rises as a result. This type of inflation is a key part of the wage-price spiral. This downward spiral involves an increase in the price of goods following a wage increase and leading to another wage increase, meant to accommodate the changing price of goods.
• Monetary inflation
Of the type of inflation, this is one of the most globally visible. It occurs when there is a sustained increase in the money supply of a country. The result of monetary inflation is often price or commodity inflation. The exact relationship between monetary and price inflation is complex. As a result there are many theories as to how it works, but no current