Essay on Inflation Rises

Submitted By oquendo28
Words: 1071
Pages: 5
Open Document
What is Inflation?
Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could beforehand.

There are several variations on inflation:
• Deflation is when the general level of prices is falling. This is the opposite of inflation.
• Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one month!
• Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices.
In recent years, most developed countries have attempted to sustain an inflation rate of 2-3%.

Causes or Types of Inflation
Economists wake up in the morning hoping for a chance to debate the causes of inflation. There is no one cause that's universally agreed upon, but at least two theories are generally accepted:
* Demand-Pull Inflation - This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.
* Cost-Push Inflation - When companies costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

Costs of Inflation
Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate corresponds to what the majority of people are expecting (anticipated inflation), then we can compensate and the cost isn't high. For example, banks can vary their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up.
Problems arise when there is unanticipated inflation:
• Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those who borrow, this is similar to getting an interest-free loan.
• Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.
• People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
• The entire economy must absorb reprising costs ("menu costs") as price lists, labels, menus and more have to be updated.
• If the inflation rate is greater than that of other countries, domestic products become less competitive.
PAPER - INFLATION
People like to complain about prices going up, but they often ignore the fact that wages should be rising as well. The question shouldn't be whether inflation is rising, but whether it's rising at a quicker pace than your wages.
Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it's not so easy to label inflation as either good or bad - it depends on the overall economy as well as your personal situation.

Hoy to Measure Inflation

Measuring
Show More

Related Documents: Essay on Inflation Rises

Rainforest: Money and House Price Inflation Essay

it is possible sometimes that the government under- or over-reacts to inflation data. What’s Wrong With Inflation? It’s a matter of degree; 25% inflation is much worse than 5% inflation. Some countries (eg Russia and Serbia) have recently had hyper-inflation with prices rising by up to 1000% pa! Low inflation, such as the 2% or so the UK has at present, is not a real problem. The UK has had a big problem with inflation in the past. It rose to 28% in the late 1970s. This caused significant…

Words 711 - Pages 3

Future Inflation Essay

Theory In the economy inflation relates to the rise in the level of prices of goods and services during a period of time. When the prices of good rises in a market economy each unit of currency would buy fewer good and services than before. The power of inflation creates a decrease in the purchasing power of money. The inflation can be measure by the inflation rate the change in the price index during a period of time. Inflation can perceived as a negative or positive effect for the economy…

Words 791 - Pages 4

Swot Notes Inflation Essay

SWOT notes for inflation. 1) Identify a general price rise and an individual price rise? General Price rise in general price level. Individual price rise is a price rise for a specific product eg butter 2) Identify and define inflation, disinflation and deflation? Inflation-Inflation can be defined as a general increase in the price level of a nation over a period of time. An increase in the price of a particular good or service does not mean that inflation has occurred. Inflation means the average…

Words 1050 - Pages 5

Essay about ECON 102 Pdf

Thursday March 19! ! Chapter 30 Inflation and Disinflation ! You will learn! - wages respond to output gaps and inflation expectations ! - how constant rate of inflation is incorporated into basic microeconomic model ! - how AD and AS shocks affect ! - what happens when BOC validates demand/supply shocks (validation process)! - three phases of inflation! - how cost of disinflation is measured by sacrifice ratio ! ! Effects of Inflation ! - failure to anticipate inflation impost costs to labour market…

Words 2090 - Pages 9

Lecture9 Inflation Essay

Macroeconomics Lecture 09 February 5, 2013 Inflation The CPI is Used to Measure the Rate of Inflation Becomes a problem when it is high & “out of control” The annual inflation rate is the percentage change in the consumer price index (CPI) from one year to the next. CPI2010 = 218.056 CPI2011 = 224.939 The inflation rate for 2011 = ((224.939 – 218.056) / 218.056) x 100% = 3.16% Your dollar lost 3.16% The higher the rate of inflation, the more quickly the U.S. $ loses its value in…

Words 872 - Pages 4

Inflation: Inflation and Ad Curve Shift Essay

Inflation Introduction: Nowadays, more people pay their attentions on one word, “inflation”, because of the weak global economy. Inflation is when rising of general price level for goods and services happens with decreasing of purchasing power for people. In a short sentence, when inflation happens, people cannot use same amount of money to buy same amount of purchases as much as before. For finding out if inflation happens and what extent it has done, we always use CPI (Consumer Price Index)…

Words 1947 - Pages 8

Essay on the chilean empire

THE BOND MARKET Bond – a fixed (nominal) income asset which has a: -face value (stated value of the bond) - coupon interest rate (stated interest rate) - maturity date (length of time for fixed income payments) Bonds are debt issued by either corporations, governments, or other entities,. They are obligated to pay the interest periodically until maturity date plus the value of the bond at the time it matures. Ex: $1,000 bond, coupon rate of 5%, maturity of 5 years - the fixed income from…

Words 3113 - Pages 13

Major Factors Affecting The Value Of The Canadian Dollar

Canadian dollar, they can raise interest rates higher than other nations. This in turn can spur investments in Canada rather than other countries causing a demand for the Canadian dollar due to the rise in higher interest rates allowing investors to gain. If the Bank of Canada chooses to stop a rise in the value of the Canadian dollar; they will accomplish this by lowering interest rates below other nations, which in turn causes relatively lower investments because the Canadian dollar is decreasing…

Words 791 - Pages 4

Essay about environmental economic

rising asset prices. During a boom, there are high levels of economic growth so businesses tend to increase their investment during this phase and many new businesses start up as well. The only disadvantage is that there may be an increase in inflation as prices rise in response to more demand and the boom period does not last forever as it becomes difficult to sustain growth. The demand for good would be high so it beats the ability of all businesses to supply all the goods that consumers would like…

Words 1001 - Pages 5

Economics: Demand-pull Inflation Essay

Discuss whether Inflation is always bad for the Economy Inflation is the sustained rise in the general price level. In this essay I will be discussing how inflation positively or negatively impacts the economy depends on a number of factors: Whether inflation is anticipated, Whether inflation is not anticipated, An individual persons situation, The cause of inflation. Inflation is an increase in prices we pay for goods and services. As inflation occurs it costs more for consumers to buy…

Words 946 - Pages 4