Inflation Definition & Meaning

Inflation allows for a single value representation of the growth in the price level of goods and services inside an economy over time and is a word used to describe the whole impact of price changes across a vast range of goods and services. Once inflation has spread across an economy, both people and companies are concerned about the possibility of future inflation.

A rise in the general price level, which is usually represented as a percentage, indicates that a unit of currency actually buys less than it normally did. While it may be simple to track the price fluctuations of certain products over time, human demands are far more complex than that. In order to live comfortably, people require a wide range of things as well as a number of services.

As a currency loses value, prices rise, which results in buying fewer products and services. The decrease in purchasing power has an effect on the general cost of living, resulting in an economic slowdown. Economists believe that sustained inflation happens when a country’s money supply grows faster than its economic growth.

In order to prevent this, the central bank, being one of a country’s proper monetary authorities, takes the required steps to manage money and credit supply in order to maintain inflation within acceptable bounds as well as the economy functioning smoothly.

Government spending is a significant component of the overall spending in every modern economy. It’s also a key factor in determining aggregate demand. Typically, in some less developed economies, government spending rises, creating inflationary pressure on the economy.

Inflation is a problem as it reduces the value of money saved today. Inflation reduces a person’s purchasing power and can even make it difficult to retire from work. While inflation provides minimal benefit to consumers, it can provide a benefit to investors who hold assets in inflation-affected countries.

Demand-pull inflation

The most typical reason for price increases is called demand-pull inflation, and this happens whenever consumer demand for products and services exceeds supply. Producers are unable to keep up with demand. The available supply declines as demand for a certain supply or service rises.

As the economic principle of supply and demand states, when there are fewer products available, people are ready to spend more to get them. As a result of demand-pull inflation, prices have risen. Companies play a role in inflation as well, specifically if they produce popular goods. Since consumers are prepared to pay the higher price, a business would increase its prices.

Cost-push inflation

Cost-push inflation happens whenever there is a supply shortage and sufficient demand for the producer to increase prices. On the supply side, a number of factors have an impact on inflation. Natural disasters damage production facilities, causing temporary cost-push inflation. A corporation that has the opportunity to form a monopoly leads to cost-push inflation as well.

Regulation and taxation by the government also decrease supply. Cost-push inflation in imports occurs when a country drops its currency’s exchange rates. As a result, international products are more expensive than goods produced domestically.