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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.
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.
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.
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.
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.
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