What does inflation means?

Answer 1

Inflation is a rise in the general price level and is reported in rates of change. Essentially what this means is that the value of your money is going down and it takes more money to buy things. Therefore a 4% inflation rate means that the price level for that given year has risen 4% from a certain measuring year (currently 1982 is used). The inflation rate is determined by finding the difference between price levels for the current year and previous given year. The answer is then divided by the given year and then multiplied by 100. To measure the price level, economists select a variety of goods and construct a price index such as the consumer price index (CPI). By using the CPI, which measures the price changes, the inflation rate can be calculated. This is done by dividing the CPI by the beginning price level and then multiplying the result by 100.

Causes of Inflation

There are several reasons as to why an economy can experience inflation. One explanation is the demand-pull theory, which states that all sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. To compensate, some merchants raise their prices. Others don't offer discounts or sales. In the end, the price level rises.

A second explanation involves the deficit of the federal government. If the Federal Reserve System expands the money supply to keep the interest rate down, the federal deficit can contribute to inflation. If the debt is not monetized, some borrowers will be crowded out if interest rates rise. This results in the federal deficit having more of an impact on output and employment than on the price level.

A third reason involves the cost-push theory which states that labor groups cause inflation. If a strong union wins a large wage contract, it forces producers to raise their prices in order to compensate for the increase in salaries they have to pay. The fourth explanation is the wage-price spiral which states that no single group is to blame for inflation. Higher prices force workers to ask for higher wages. If they get their way, then producers try to recover with higher prices. Basically, if either side tries to increase its position with a larger price hike, the rate of inflation continues to rise.

Finally, another reason for inflation is excessive monetary growth. When any extra money is created, it will increase some group's buying power. When this money is spent, it will cause a demand-pull effect that drives up prices. For inflation to continue, the money supply must grow faster than the real GDP.

Effects of Inflation

The most immediate effects of inflation are the decreased purchasing power of the dollar and its depreciation. Depreciation is especially hard on retired people with fixed incomes because their money buys a little less each month. Those not on fixed incomes are more able to cope because they can simply increase their fees. A second destablizling effect is that inflation can cause consumers and investors to changer their speeding habits. When inflation occurs, people tend to spend less meaning that factories have to lay off workers because of a decline in orders. A third destabilizing effect of inflation is that some people choose to speculate heavily in an attempt to take advantage of the higher price level. Because some of the purchases are high-risk investments, spending is diverted from the normal channels and some structural unemployment may take place. Finally, inflation alters the distribution of income. Lenders are generally hurt more than borrowers during long inflationary periods which means that loans made earlier are repaid later in inflated dollars.

Answer 2

Inflation measures the trend in changing prices. So if the average cost of living goes up from £100 per week to £110 per week, there has been a 10% inflation in the cost of living.

Answer 3

Well, literally inflation means having loads/tons of money circulating within the economy, and yet chasing very few goods on the market.

When you break it down, people are having a lot of money on them, yet the goods they want to purchase on the market are few.This means that the suppliers will increase the prices of these goods because the demand for them is high, yet the supply is low, hence inflation.

Answer 4

hi Sheilla,

In economy, the word “inflation” refers to a general rise in prices measured against a standard level of purchasing power.

What means that the stuff you want to buy is getting more expensive, while you have the same amount of money. Your money is worth less that way!

Answer 5

the word “inflation” refers to a general rise in prices measured against a standard level of purchasing power

Answer 6

Its a rise in the general level of prices which has the effect of reducing the purchasing power of a given amount of money.

Answer 7

The sales price of an item is increased, but the value does not increase. For example, a new car is priced to sell at $20,000. After six months, the price is raised to $20,500. Nothing happens to make the car worth more money, but you would have to pay more to buy it.

Answer 8

In basic terms, inflation is when the cost of living (food, rent, transport) goes up but the average salary/wage, does not.

edit: not sure why i got two thumbs down when i right!

Answer 9

to keep it simple:
i bought a pen for 1$
next month the same pen cost me 2$
value of money decreases

Answer 10

in·fla·tion [in-fley-shuhn]

–noun 1. Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency (opposed to deflation).