What is Inflation?

Inflation is a maintained level of increase on a general basis of prices for goods and services. It is gauged as the annual percentage rise.

As inflation increases, every dollar a client owns buys a lower percentage of a good or service.

When inflation occurs, the value of the dollar does not stay consistent. In terms of purchasing power, the value of the dollar is observed, which comprises of the real tangible goods that money can acquire.

Whenever inflation gains, the purchasing power of money experience declines.

For instance, annually, the inflation rate settles at 2%, and then theoretically a $1 pack of gum will cost about $1.02 within a year. After the occurrence of the inflation, your dollar can no longer buy the same goods as it could before. 

Variations on inflation:

· Deflation – the general level of prices when declining, or basically the opposite of inflation.

· Hyperinflation – a usual rapid inflation. In serious cases, a nation’s monetary system can lead to a breakdown. For example, in 1923, Germany had a hyperinflation and prices jumped 2.500% in a month!

· Stagflation – high unemployment combined with the economic stagnation with inflation. In 1970s, in industrialized countries, a weak economy was combined with OPEC surging oil prices.

Most developed countries are sustaining an inflation rate about 2-3% in recent years.

Causes of Inflation

Economists gave their best chance to debate on what causes inflation. There was never a one cause that’s globally agreed upon, however, there are two theories that are generally accepted:

Demand-Pull Inflation – it is a theory pertaining as “too much money chasing too few goods.” In simple words, if the growth of demand rapidly increases than the supply, the prices will increase. Rising economies usually experience this.

Cost-Push Inflation – when a company’s costs are soaring, their prices are required to gain in order to maintain their profit margins. Elevated costs can include wages, taxes, or raised costs of imports.