INTRODUCTION TO INFLATION
I asked my grandparents about the cost of living during World War II. They told me people during that period could buy a house for $5,000, a car for $1,100 or a loaf of bread for $0.15. Today, the average salary of $2,400 in 1942 is equivalent to renting a three-bedroom apartment or a price per square meter to purchase an apartment. From that point, a lot has changed.
We have experienced a substantial amount of inflation over the last 60 years. In 1970s, the average inflation was 7.25%. The American government declared it their top enemy. Since then, the country has been contending with inflation. But people remain anxious about it even if the United States has controlled it in the last few years. The general public knows prices go up or down over time. However, they do not know the several factors behind price fluctuation, including inflation.
What is inflation? What the factors behind inflation? How is inflation computed? How does it affect the economy? How does it affect one’s standard of living?
Before we begin the tutorial, let us have a primer on inflation. It pertains to a sustained increase in the overall level of prices for products and services in the economy over a time period. Inflation is gauged as an annual percentage increase. As inflation climbs, the purchasing power falls. Conversely, as it drops, the purchasing power rises.
Do you know central banks such as the Federal Reserve, the Bank of England, and the European Central Bank, are particular with inflation? They seek to curb inflation and deflation to reduce the impact of excessive growth of prices. Most of them attempt to maintain an inflation rate of 2% to 3%.
Inflation affects an economy in different ways, positively or negatively. It enables adjustment of relative wages and prices, and can bolster economic growth. On the other hand, inflation can escalate opportunity cost of holding money and uncertainty over inflation in the future, which can discourage investment and savings in the long run.
To know more about inflation, let this tutorial guide you.
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Macroeconomics: Basic Concepts
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