Inflation is the sustained increase in the overall level of products and services in an economy over a particular time period. Expressed as percentage, the purchasing power declines as inflation rises. On the other hand, the purchasing power climbs as inflation drops. Most developed countries make it a point to retain an inflation rate of 2% to 3%.

Inflation has different variations:

  • Deflation - Overall plunge in prices caused by reduction in the supply of money or credit.
  • Hyperinflation - Severely rapid or out of control inflation. As a result, a country’s monetary system can crumple.
  • Stagflation - Combination of relatively high unemployment and economic degeneration accompanied by inflation.

Economists identified at least two causes of inflation:

  • Demand-Pull Inflation - In essence, the theory states too much money is chasing too few products. If demand is increasing faster than supply, prices will escalate.
  • Cost-Push Inflation - Companies need to raise prices when costs go up in order to retain their profit margins. Costs include salaries, taxes, or imports.

Several instances arise in the event of unanticipated inflation.

  • Creditors lose and borrowers gain. For debtors, it is similar to obtaining an interest-free loan.
  • Uncertainty about the future makes companies and consumers spend less, affecting the overall economy in the long run.
  • Individuals depending on fixed income see a plunge in their purchasing power and standard of living.
  • The general economy must digest repricing expenses as labels, menus, and price list need to be updated.
  • Domestic products become less competitive if the inflation rate is higher than of other nations.

We often consider inflation as evil because prices go up. But, we often dismiss the fact salaries should be increasing, too. An inflation indicates an economy is expanding. A little inflation or deflation is tantamount to high inflation. Conversely, lack of inflation denotes the economy is weakening.

One cannot classify inflation as good or bad per se. It affects different people in various situations.