Inflation is a continuous and considerable rise in price in general or it is a phenomenon which affects everybody in one way or another. It can argued that inflation may have beneficial effects on an economy; for example, it may be consistent with a low level of unemployment and, if prices tend to be inflexible downwards, it may enable the price mechanism to work more effectively. Inflation does not refer to a once-and-for-all increase in prices.What is a issue here is continuous increase in prices.
Inflation is a process in which the prices of most goods and services are increasing from year to year (or even month to month).Inflation has to be carefull defined, it is not simply 'rising price' for as the prices of some goods rise others may fall leaving the general level of prices unchanged. Nor should iflation be defined simply as increase in the general price level for an increase one month may be offset by a decrease the next. For iflation to be taking place, it is necassary that the general price level be rising continuously over a fairly long period of time( for example, severl months or year)
The next question is: which measure of the general price level should be used to calculate the rate of inflation? The general price level can be estimatad in different ways: in the United Kingdom, for example ther are wholesale prise indices and a retail price index. The most commonly used indicator of the general price level is the consumer price index (CPI) and production price index (PPI)
Effects
Inflation can either be anticipated or unanticipated.If it is fully anticipated, then all groups and individuals in the economy expect it and are able to gain full compensation for it. Inflation however, may be unanticipatted for two possible reasons: (a) if there is a general failure on the part of the economy as whole to predict the inflation correctly (b) if certain groups or individuals, even though they may correctly predict the inflation, are unable to gain full compensation for it (for example, if they have weak unions or if they earn contractually fixed incomes).
As far as the distribution effects are concerned, inflation tends to redistribute income and wealth from creditors to debetors. In other words, debotors (borrowers) tend to gain, while creditors (lenders) tend to lose. if you borrow say $100 and repay it year later, the $100 that you repay is worth much less than the $100 you borrowed. You will have to pay interest, of course, but interest is simply the price that you have to pay to acess to finds for the period concerned. If the interest rate lower is than inflation rate, the debtor (borrower) gains in this respect as well.The difference between the nominal interest rate and inflation rate is called real interest rate. If nominal interest rate is lower than the inflation rate, the real interest rate is negative.
Causes
Inflation is a complex, dynamic process which cannot be ascribed to a single couse. It can, for examle, originate demond side or supply side (or cost) side of the economy. On the other side, prices can be pulled up as it were by, for example:
Increase consumption spending by household, for example, as a result of a greater availability of consumer credit or the availability of cheaper credit as aresult of a drop in interest rates.
Increased investment spending by firms, for example as a result of lower interest rates or an improvement in profit expectations
Increased government spending, for example to combat unemployment
Incresed export earning, for example as a result of improved econpomic conditions in rest of the world
From the supply side or cost side prices can be pushed up as it is were by, for example:
Increases in wages and salaries
Increase in the cost imported capital and intermidate goods
Increase in profit margins
Decreased produtivity
Natural disasters
Measures have to be taken to avoid increases in the cost of production. Increases in Wages and Salaries and profits margins have to be kept under control. Increases in productivity can also help to avoid or combat cost push inflation. Another possible measure is to apply an incomes policy. An income policy implies some form of government intervention in the determination of wages and prices.
