Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power of money – a loss of real value in the medium of exchange and unit of account within an economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index CPI Report) over time.
Inflation's effects on an economy are various and can be simultaneously positive and negative.
Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future.
Positive effects include reducing unemployment due to nominal wage rigidity, allowing the central bank more leeway in carrying out monetary policy, encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation.
Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.
Historically, high rates of inflation have often been caused by the government printing more money to fund wars or other government spending, although this is not always the case. Money supply growth can also be driven by private sector credit expansion, as happened during the late-2000s financial crisis.
Inflation can also be caused by an increase in the price of a key raw material or commodity, such as oil. This is called cost-push inflation, because the increased cost of production is passed on to the consumer in the form of higher prices.
Inflation is measured by the percentage change in the consumer price index (CPI) over time. The CPI measures the average price of a basket of goods and services consumed by households. Central banks attempt to limit inflation and avoid deflation in order to keep the economy running smoothly.
There are several methods that central banks use to measure and forecast inflation. These include the consumer price index (CPI), the producer price index (PPI), and the personal consumption expenditures (PCE) price index.
There are several ways to combat inflation. One way is through the use of monetary policy, which involves adjusting the money supply and interest rates. Another way is through the use of fiscal policy, which involves adjusting government spending and taxation. (Let's be real the governments never going to take less money)
