The concept of Inflation

Amidst all the expensive things today, one thing is for sure: prices would definitely continue to rise. All because of one culprit - Inflation.

"Inflation is inevitable like death"

INTERESTING FACT: McDonald's Big Mac costed $ 0.45 in 1967, $2.75 in 1995 and $5.30. Today the same Big Mac costs $8.70!!

In simpler words, Inflation is the rate of increase in prices of goods and services across the economy over a period of time eroding purchasing power for both consumers and businesses.

Demand-Pull and Cost-Push: These are the two causes of inflation.

In the demand-pull scenario, consumer demand for goods and services is greater than the available supply. Thus, the pricing of those items is raised to prevent inventories from being depleted.

Cost-push Inflation happens on the supply side. Sellers raise their pricing in order to cover their increased production costs such as labour and components of the items they produce.

TYPES OF INFLATION

As the nature of inflation is not uniform in an economy everyday, it is wise to distinguish between different types of inflation. Inflation may be caused by a variety of factors.

1. Creeping Inflation: Creeping or mild inflation is when prices rise 3% a year or less. this mild inflation sets expectations that prices will continue to rise. As a result, it sparks an increased demand as consumers will now decide to buy more before prices rise again. By increasing demand, mild inflation drives economic expansion.

2. Walking Inflation: This type of strong inflation is when prices rise between 3-10% a year. It is harmful for the economy because it heats up economic growth too fast. People start to buy more than they need, just to avoid tomorrow's much higher prices.

3. Galloping Inflation: When inflation rises to ten percent or greater, it creates an absolute havoc in the economy. Money loses value at such a fast pace that businesses and incomes can't keep up with the costs and prices. Foreign investors avoid the country, depriving it of needed capital. The economy becomes unstable, and government leaders lose credibility. Galloping inflation must be prevented.

4. Hyper Inflation: hyperinflation is a term used to describe rapid, excessive and out of control general rise in prices which can typically be at 50% per month. Although, hyperinflation is a rare event for developed countries but it has occurred many times in history in countries like China, Germany, Hungary etc. Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and during the American Civil War.

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Now, an important question that arises is - "How can inflation be controlled?"

Well, there are two main ways in which governments try to control inflation:

1. Fiscal Measures

These measures are highly effective for controlling government expenditure, personal consumption expenditure, and private and public investment and mainly include measures taken by the government like:

Reduction in Unnecessary Expenditure, Increase in Taxes, Surplus Budgets, Stopping the repayment of Public Debt, etc.

2. Monetary Measures

Monetary measures aim at reducing money incomes by adopting credit control methods, demonetising the currency, issuing new currency, etc.