Inflation is a sustained increase in the general level of prices for goods and services in an economy over a period of time. It is measured by calculating the percentage change in prices from one year to the next. In this brief, we will explore how inflation works, what causes it and how it can be controlled.
How does inflation work?
Inflation is caused by an increase in the money supply. When there is more money chasing after goods and services, prices go up. Economists use something called the Consumer Price Index (CPI) to take measurement. The CPI measures the prices of a basket of goods and services that are typically purchased by consumers. The CPI is then used to calculate the rate of inflation.
What causes inflation?
Aan increase in the money supply. This can be due to a variety of factors, such as quantitative easing (QE) or government spending. It can also be caused by demand-pull inflation, which occurs when there is too much demand for goods and services in the economy. This can be caused by things like an increase in population or a rise in consumer confidence.
How is inflation controlled?
Inflation can be controlled through monetary policy. The most common tool used by central banks is interest rates. By raising or lowering interest rates, central banks can influence the amount of money that is in circulation. If there is too much money in circulation, prices will go up and inflation will occur. If there is not enough money in circulation, prices will go down and deflation will occur. Another way that central banks can take control is through quantitative easing (QE). QE is when the central bank creates new money and uses it to buy assets, such as government bonds. This new money enters the economy leads to the increase of prices of goods.
The pros of inflation are that it can stimulate economic growth by encouraging spending. It can also make it easier for businesses to borrow money and expand their operations. In addition, it can help to reduce the value of debt.
The cons of inflation are that it can lead to higher prices and reduced purchasing power. It can also cause uncertainty in the economy and create financial instability.
Inflation is a sustained increase in the general level of prices for goods and services in an economy over a period of time. It is measured by calculating the percentage change in prices from one year to the next. In this brief, we have explored how this financial phenomenon works, what causes it and how it can be controlled.Show me today's rates (Sep 27th, 2023)