What is Inflation?

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Inflation is an economic term which, when put simplistically, means an increase in the price that people pay for goods. Another way to put it, inflation is the decreased purchasing power of a currency.
Inflation is typically categorized in two: price inflation and monetary inflation. Price inflation is the increase in the selling price of standard consumer goods and services over a period of time. Monetary inflation is the increase in a country’s currency supply, which results to a price inflation.

Let’s look at samples of inflation: for instance, the bag of sugar that cost $5 last year could already be at $7 this year. This is caused by the changing amount of money in an economy, pitted against the consumer supply available for purchase. The inflation on your bag of sugar for this year might have been caused by not enough sugar produced by your country, making the value of the reserve sugar higher than last year’s.

Another example could be in your salary: let’s say that last year you were earning $10 per hour, and your basic daily food expense was at $10. This year, you’re earning the same amount, but your basic food expense has risen up to $15. Your money has lost some of its purchasing power, and that is inflation.

There are means to determine a country’s inflation rate, and the higher it is, the more disadvantage it brings. For instance: possibly higher taxes, decreased confidence from investors, and decreased goods production.

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One Response

  1. Abby

    December 5, 2012 6:17 am

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