I know it’s really weird to read this, but yes, it is important. It’s a natural part of the economic cycle, and we have no control over it. While there are many causes of inflation and ways to control it, many economists agree that it’s impossible to keep inflation at a constant rate. To get a quick grasp of its causes and importance, read on until the end.
What is inflation?
Inflation is a overall rise in expenses and a fall in the buying value of currency. It means that the amount of goods and services you can buy with a given amount of money decreases over time.
Inflation occurs when a country’s money supply is growing either faster or slower than the supply of goods and services. For example, say the government prints more money to pay for a war. That means there’s more money in circulation, but actual goods and services aren’t increasing at the same rate. The net result: Prices rise; inflation has occurred.
What Causes Inflation?
Inflation, sometimes referred to as “the cost of living,” is a rise in expenses for the things and amenities in an economy. A combination of generally drives inflation
- Money supply: If the amount of money in circulation increases, the value of each unit decreases. When it increases faster than the resulting production, inflation rises because many dollars will rush against very few products.
- Increased wages: If employers pay more to their employees, the cost of production goes up, and companies pass those costs on to consumers (in other words: inflation).
- Devaluation: When a country’s currency drops in value against foreign currencies or gold, it becomes cheaper for importers and more expensive for exporters to do business abroad.
- Cost-push occurs when there is an increase in costs associated with production or distribution within an economy, leading to higher prices.
- Demand-pull: It occurs because of increased aggregate demand. It is the opposite of cost-push inflation, where rising costs push prices upwards. In simple words, when demand for products outstrips supply.
- Government policies: They can also contribute to inflationary pressures. For example, when the government offers tax subsidies for certain products, demand and prices increase.
Aggregate demand VS Aggregate supply:
Inflation occurs when there is an increase in aggregate demand or when aggregate supply decreases. Aggregate demand is total spending by consumers, businesses, governments, and foreign buyers. Aggregate supply is the entire expense of merchandises and amenities available for sale in an economy at any given time.
Why do we have to live with inflation?
If there’s too much money chasing too few goods, why not just take some of that money away? The problem is that when you try to remove excess money from an economy, it causes a severe problem – deflation. A little inflation is needed for the economy to grow – too much leads to recession or depression. That’s why we have to live with inflation.”
Conclusion:
Inflation is one of those economic forces that can affect everyone, no matter their income level. It’s something we all have to live with. Fortunately, there are ways you can insulate your savings from its corrosive effects. On the other hand, its negligence can lead to severe issues.
