What Is Inflation?

 Inflation Definition

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods. Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency.

Causes of Inflation

Demand-Pull Effect:
Demand-pull inflation occurs when the overall demand for goods and services in an economy increases more rapidly than the economy's production capacity. It creates a demand-supply gap with higher demand and lower supply, which results in higher prices. For instance, when the oil-producing nations decide to cut down on oil production, the supply diminishes. It leads to higher demand, which results in price rises and contributes to inflation.

Cost-Push Effect:

Cost-push inflation is a result of the increase in the prices of production process inputs. Examples include an increase in labor costs to manufacture a good or offer a service or increase in the cost of raw material. These developments lead to higher cost for the finished product or service and contribute to inflation.

Built-In Inflation:

Built-in inflation is the third cause that links to adaptive expectations. As the price of goods and services rises, labor expects and demands more costs/wages to maintain their cost of living. Their increased wages result in higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa.

Control of inflation

The different measures used for controlling inflation are explained below.

Monetary measures: The best remedy to fighting to inflation is to reduce aggregate spending. Monetary policy can help in reducing the pressure of demand by increasing the cost of borrowing from bank thus reducing the demands for funds.

Fiscal measures: It includes spending both private and government level. Government reducing expenditures and private expenditure reduced increasing tex.

Physical and non-monetary measures: Measures like increasing output/imports, decrease exports so as to increase the available supply of goods in short supply, so at bring the demand and supply at parity and thus the prices tend to be controlled.