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What is Inflation?

Nicole Madison
Nicole Madison
Nicole Madison
Nicole Madison

Inflation is an increase in general prices for goods and services. To be considered inflation, the rise in prices must be widespread and occur over an extended time frame. Simply put, the rise must reflect changes in the economy as a whole. This increase reduces the value of money. When inflation is at work, consumers spend more money for the same goods and services they were previously able to purchase at lower prices.

There are several methods used to measure inflation. The Consumer Price Index (CPI) is the most common measurement. As its name suggests, the CPI measures it in terms of consumer prices. Another common measurement method is the Gross Domestic Product Deflator (GDP-Deflator). The GDP-deflator assesses inflation in the overall economy as it affects all branches of government and business, as well as consumers.

Inflation is when consumers must pay a higher price for a service that previously cost less.
Inflation is when consumers must pay a higher price for a service that previously cost less.

There are many other measures of inflation that are targeted towards particular economical sectors. For example, the Employment Cost Index (ECI) measures it as it occurs affects labor. Other measurements focus on interest rates and the expectations of consumers or business people. With so many different ways of measuring inflation, it may seem hard to figure out which one should be used and when. Basically, the method of measurement depends on how the measurements will be used.

Inflation is the result of printing too much money, which lowers its value and raises prices.
Inflation is the result of printing too much money, which lowers its value and raises prices.

One common way of measuring inflation involves comparing two sets of products. These products are compared at different times to note any price changes. To be considered an increase in cost caused by inflation, price changes cannot be due to improved quality. Furthermore, price increases must affect a large number of products and services. Rising prices that affect just a few products are not considered inflation.

For the consumer, inflation lowers the value of currency, as the cost of what they buy goes up.
For the consumer, inflation lowers the value of currency, as the cost of what they buy goes up.

It is generally accepted that inflation is caused by increases in the supply of money. With the printing of too much money comes the natural rise of prices. Many economists assert that money-related matters are the primary factor in setting inflation rates. Others assert that the movements of money and interest rates, in conjunction with output, are the chief factors leading to it. However, there are other theories.

Inflation increases the cost of living, frequently much faster than employees' wages rise.
Inflation increases the cost of living, frequently much faster than employees' wages rise.

While many consumers view inflation as wholly negative, that is not always the case with economists. Surprisingly, small-scale inflation can be seen as positive in terms of the overall economy. For example, it is often viewed as incentive for individuals to invest, instead of merely saving. It also affords central banks the maneuverability to stimulate the economy.

Nicole Madison
Nicole Madison

Nicole’s thirst for knowledge inspired her to become a WiseGEEK writer, and she focuses primarily on topics such as homeschooling, parenting, health, science, and business. When not writing or spending time with her four children, Nicole enjoys reading, camping, and going to the beach.

Learn more...
Nicole Madison
Nicole Madison

Nicole’s thirst for knowledge inspired her to become a WiseGEEK writer, and she focuses primarily on topics such as homeschooling, parenting, health, science, and business. When not writing or spending time with her four children, Nicole enjoys reading, camping, and going to the beach.

Learn more...

Discussion Comments

anon102491

Scrutinize "SA" economic status in respect of inflation and illustrate how would you strategize to face such a challenge if you were the part of the central planning committee.

hema

What is the interlinkages between CRR, SLR, Bank Rate, Interest Rate and that to inflation.

Will rise in Tax – GDP ratio affects inflation? If so how?

Is it right to say that “cut in repo rates will bring down call rates”. If so how?

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    • Inflation is when consumers must pay a higher price for a service that previously cost less.
      By: RTimages
      Inflation is when consumers must pay a higher price for a service that previously cost less.
    • Inflation is the result of printing too much money, which lowers its value and raises prices.
      By: idildemir
      Inflation is the result of printing too much money, which lowers its value and raises prices.
    • For the consumer, inflation lowers the value of currency, as the cost of what they buy goes up.
      By: Vasiliy Koval
      For the consumer, inflation lowers the value of currency, as the cost of what they buy goes up.
    • Inflation increases the cost of living, frequently much faster than employees' wages rise.
      By: highwaystarz
      Inflation increases the cost of living, frequently much faster than employees' wages rise.
    • The Federal Reserve constantly monitors for inflationary risks to the U.S. economy.
      By: qingwa
      The Federal Reserve constantly monitors for inflationary risks to the U.S. economy.