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What is inflation

by Merch C.

Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power. Here are some key points to help you understand inflation better.

1. Types of Inflation

Demand-Pull Inflation : Occurs when the demand for goods and services exceeds their supply, causing prices to rise.
Cost-Push Inflation : Happens when the costs of production increase, leading to higher prices for finished goods and services.
Built-In Inflation : Results from the expectation of future inflation, leading to higher wages and prices.

2. Measuring Inflation

Consumer Price Index (CPI) : Measures the average change over time in the prices paid by consumers for a basket of goods and services.
Wholesale Price Index (WPI) : Tracks the price changes at the wholesale level, before products reach consumer.

3. Causes of Inflation

Increased Money Supply : When more money is available in the economy, it can lead to higher demand and, consequently, higher prices.
Supply Chain Disruptions : Shortages or bottlenecks in the supply chain can push prices up.
Higher Production Costs : Increases in wages, raw materials, and other production costs can lead to higher prices for consumers.

4. Effects of Inflation

Decreased Purchasing Power : Money buys less than it did before, affecting consumers' ability to purchase goods and services.
Impact on Savings : Inflation can erode the value of savings if the interest rates on savings accounts are lower than the inflation rate.
Economic Uncertainty : High inflation can lead to uncertainty in the economy, affecting investment and spending decisions.

Understanding inflation is crucial as it affects everyone in the economy, from consumers to businesses and policymakers.

Posted : 02 March 2025

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