What do you understand by the term Inflation?
Definition: It refers to a situation whereby there is a sustained, inordinate and general increase in prices.
In economics, the term inflation is a rise in the basic level of prices of goods, services in an economy over a certain period of time. When the basic price level rises, each or every unit of currency buys smaller number goods, services. As a result, inflation also represents erosion in the buying power of money – a loss of actual worth in the internal standard of exchange and a unit of account in the general economy. A chief measure of price inflation is called as inflation rate and the annualized percentage change in a general price index usually the Consumer Price Index over certain time period.
The effects of inflation on an economy are many and may be simultaneously positive and may be negative. Negative things of inflation involves a decrease in the actual value of money and other monetary items over time period, uncertainty over the future inflation that may discourage investment or savings, and if inflation is rapid enough, lack of goods as consumers begin hoarding out of concern which prices will raise in the future. Positive effects involves ensuring which central banks can adjust nominal interest rates intended to mitigate recessions, or you can say encouraging investment in non-monetary capital projects.
Economists usually agree that up rates of inflation and hyperinflation are caused of reason by an extreme growth of the money supply. Views on those factors decide low to moderate rates of inflation are much varied. Low or modest inflation can be stated to fluctuations in actual demand for products or goods, services, or changes in accessible supplies for example as during scarcities, and to growth in the money supply. Thus, the consensus view is which is a long sustained period of inflation is formed by money supply increasing faster than the rate of economic growth.
During these days, most economists or experts favor a low, steady rate of inflation. Low or you can say as opposed to zero or negative inflation reduces the severity of economic recessions by enabling the labor market to correct more quickly in a downturn, and reduces the risk which a liquidity trap prevents monetary policy from stabilizing the economy. The task of maintenance the rate of inflation low and stable is usually shown to monetary authorities. Usually, these monetary establishments are the main banks which control monetary through open market operations, policy through the setting of interest rates, and through the setting of banking reserve requirements.
Types of Inflation on Coverage
1. Comprehensive Inflation
2. Sporadic Inflation
Types of Inflation on Time of Occurrence
1. War-Time Inflation
2. Post-War Inflation
3. Peace-Time Inflation
Types of Inflation on Government Reaction
1. Open Inflation
2. Suppressed Inflation
Types of Inflation on Rising Prices
1. Creeping Inflation
2. Chronic Inflation
3. Walking Inflation
4. Moderate Inflation
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