Inflationand Its Causes
Introduction
Inflation refers a rise in the general level of prices of goods and services in an economy and it is calculated for a period of time. The rising of general level of price of goods and services lessen the buying power of currency. As result inflation occurs, this results a reduction in the purchasing power per unit of money- a loss of real value in the medium of exchange and unit of account within the economy.
An economy can be affected by the result of inflation on various modes. It can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin to hold out a concern that prices will increase in the future.
Positive effects can be seen when central bank brings initiatives to mitigate recessions and encouraging investment in non-monetary capital projects.
Measurements of inflation
To measure inflation, a number of goods that are representative of the economy are put together into market basket. It is then compared over time. This results in a price index. Price index shows the changes in the cost of the present market basket as a percentage of the cost of that identical basket in the previous year.
There are two main price indexes that measure inflation: * Consumer Price Index (CPI) – A measure of price changes in the retail market of consumer goods and services such as petrol, food, clothing and automobiles. The CPI measures price change from the perspective of the retail buyer. It is the real index for the common people. It reflects the actual inflation that is borne by the individual. * Wholesale Price Index (WPI): It takes into account the rise in prices of goods and services in a select range of goods and services at the wholesale level. Since the general public does not buy at the wholesale level, it does not
Inflation refers a rise in the general level of prices of goods and services in an economy and it is calculated for a period of time. The rising of general level of price of goods and services lessen the buying power of currency. As result inflation occurs, this results a reduction in the purchasing power per unit of money- a loss of real value in the medium of exchange and unit of account within the economy.
An economy can be affected by the result of inflation on various modes. It can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin to hold out a concern that prices will increase in the future.
Positive effects can be seen when central bank brings initiatives to mitigate recessions and encouraging investment in non-monetary capital projects.
Measurements of inflation
To measure inflation, a number of goods that are representative of the economy are put together into market basket. It is then compared over time. This results in a price index. Price index shows the changes in the cost of the present market basket as a percentage of the cost of that identical basket in the previous year.
There are two main price indexes that measure inflation: * Consumer Price Index (CPI) – A measure of price changes in the retail market of consumer goods and services such as petrol, food, clothing and automobiles. The CPI measures price change from the perspective of the retail buyer. It is the real index for the common people. It reflects the actual inflation that is borne by the individual. * Wholesale Price Index (WPI): It takes into account the rise in prices of goods and services in a select range of goods and services at the wholesale level. Since the general public does not buy at the wholesale level, it does not