WHAT IS INFLATION?

A persistent rise in the overall general level of prices is called Inflation. Over a specific

period, usually a year, inflation calculates how much more expensive a set of goods and

services have become. Inflation is typically measured in broad terms, such as the general rise

in prices or the rise in a nation's cost of living. But it can also be calculated more precisely for

some products, like food, or for services, like a haircut (Inflation: Prices on the Rise, 2019b).

Price increases, or inflation, can be thought of as the gradual loss of purchasing power. The

ordinary price hike of a basket of goods and services over time can be used as an indicator for

the percentage at which purchasing power declines. For a real example, if one purchased a

packet of chips last year and it was worth $1, and now the same packet at the same store is

worth $1.5, that increase in price is called inflation.

Inflation erodes the purchasing power of money, making it less valuable over time. While

some inflation is normal and even desirable, as it signals economic growth, excessive

inflation can have negative consequences for the economy and its citizens. (Inflation: Prices

on the Rise, 2019). Inflation is a complex phenomenon that is influenced by a range of

factors, including economic growth, productivity, population growth, and changes in the

money supply. Central banks use a range of tools to control inflation, including adjusting

interest rates, changing reserve requirements for banks, and open market. However, these

tools are not fool proof, and the central bank's ability to control inflation can be influenced by

external factors, such as shocks to the economy or changes in global commodity prices

(Inflation: Prices on the Rise, 2019). Consumer price index and purchasing power parity are

methods to calculate the amount of inflation or deflation in a country. 

WHAT CAUSED THE RECENT INFLATION?

When an economy's total demand for goods and services grows faster than its ability for

production, inflation results. A central bank that sharply increases the money supply could be

one factor that shocks overall demand. Rising prices can also come from the economy's

supply or demand sides. Natural disasters and other supply shocks that interfere with

production or increase manufacturing costs, such as high oil prices, can dramatically reduce

supply and cause "cost-push" inflation, in which the cause of price increases is a disturbance

in supply. On the other hand, demand shocks like a stock market surge or expansionary

policies like when a central bank lowers lending rates or when a government increases

spending can momentarily enhance global demand and economic growth. The stress on

resources is evidenced in "demand-pull" inflation, though, if this demand rise outpaces an

economy's capacity for production (Inflation: Prices on the Rise, 2019b).

High inflation is a problem that the Bank of Canada faces specifically because of the global

COVID-19 pandemic. For Canadians, particularly those with limited or tight budgets, high

inflation is making living harder. While some of these rising prices are a result of outside-our-

control global developments, inflation in Canada increasingly reflects domestic events.

Domestic demand for goods and services is outpacing domestic economic capacity to meet it.

There are not enough workers for businesses to hire. (Bank of Canada, n.d.-b). Due to the

resilience of Canadian businesses and workers during pandemic lockdowns, the economy

bounced back. The majority of expenses shifted back to services as the economy recovered

because Canadians wanted to make up for lost time.

However, businesses struggled to hire and train enough staff to handle the increase in demand

—many of which had fired workers during the lockdowns. As a result, there was a labour

shortage, which increased the stress on production costs. Many companies started raising

prices as a result of rising demand and still-damaged supply chains, which resulted in higher

costs being passed on to customers (Bank of Canada, n.d.).

The Canadian currency lost 96.98% of its value between 1915 and 2023, according to an

inflation calculator. As a result, prices today are roughly 24.68 times higher than they have

been on average since 1915.  “$1 in 1915 is worth $24.68 today.” (Inflation Rate Between

1915-2023 | Canada Inflation Calculator, n.d.-d)

WHY DO PEOPLE PUT UP WITH POOR MANAGEMENT OF CURRENCY

VALUE?

In order to achieve economic objectives like stable prices, moderate inflation, and financial

growth, governments as well as central banks handle currencies. Through instruments of

monetary policy like open market operations, central banks can regulate the amount of money

in circulation. Authorities may also issue virtual money that isn't linked to anything tangible.

Individuals put up with this type of currency administration because they believe it's essential

for the cumulative health of the banking system and economy (Bajpai, 2022).

Individuals are powerless when it comes to controlling the complex economic and global

factors that influence inflation and the value of their currency, making it impossible for them

to control it. People may be able to protect themselves from the impact of inflation by making
investments in assets that increase in value, but they are powerless to change the broader

macroeconomic factors that influence the value of their currency. People therefore

must adjust to shifting economic conditions and depend on policymakers to control inflation

and uphold economic stability.

Another reason why citizens may tolerate the decline in their currency's value is that they do

not have a choice. Money is a necessary medium of exchange, and citizens must use their

country's currency to conduct transactions. While citizens may choose to use other forms of

money, such as gold or cryptocurrency, these options are often limited and may not be

accepted by most merchants.

Furthermore, central banks and governments have a responsibility to manage their currencies

and control inflation. This responsibility is enshrined in law and is essential for maintaining

economic stability and promoting growth. If central banks were to focus solely on

maintaining the value of their currencies, they could cause economic stagnation or even

deflation, which can be just as damaging to the economy as inflation.

It is worth noting that inflation is not necessarily a bad thing. In fact, some level of inflation

is desirable, as it can stimulate economic growth and prevent deflation. When prices increase,

businesses have an incentive to produce more goods and services, which can create jobs and

increase economic output. Inflation can also make it easier for borrowers to repay their debts,

as the value of the money they borrowed is eroded over time.

CONCLUSION
Even though it may seem unsettling that a currency's value has dropped over time, it is

crucial to consider the overall picture of financial stability and expansion. Some people hold

the opinion that central banks have not done enough to control inflation and that citizens are

paying the price through higher costs of living and reduced purchasing power while some

also argue that central banks are too closely aligned with governments and may prioritize

political objectives over economic stability.

However, others argue that central banks are doing the best they can give the complex and

unpredictable nature of inflation. It is also crucial to understand that there are other factors

besides central bank policies that can affect inflation. While there may be variances in the

value of a currency, a stable and expanding economy is ultimately what matters to citizens,

who trust central banks to make decisions that are in the best interests of the economy as a

whole and can also raise questions if they feel otherwise in a diplomatic and peaceful manner.
BIBLIOGRAPGY AND CITATIONS:

Inflation: Prices on the Rise. (2019b, July 30). IMF.

https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation

Bank of Canada. (n.d.-b). What’s happening to inflation and why it matters.

https://www.bankofcanada.ca/2022/10/whats-happening-to-inflation-and-why-it-

matters/

Inflation Rate between 1915-2023 | Canada Inflation Calculator. (n.d.-d).

https://www.officialdata.org/ca/inflation/1915?amount=1

Inflation Rate between 1915-2023 | Canada Inflation Calculator. (n.d.).

https://www.in2013dollars.com/Canada-inflation#:~:text=The%20Canadian%20dollar
%20has%20lost%2096%25%20its%20value%20since%201915&text=%24100%20in
%201915%20is%20equivalent,cumulative%20price%20increase%20of%202%2C367.68%25

Bank of Canada. (n.d.). Understanding the reasons for high inflation.

https://www.bankofcanada.ca/2023/03/understanding-the-reasons-for-high-inflation/
#:~:text=Global%20and%20domestic%20forces%20are%20now%20cooling
%20inflation&text=Meanwhile%2C%20we%20have%20been%20raising,return%20to%20our
%202%25%20target

Bajpai, P. (2022, March 28). How Central Banks Control the Supply of Money. Investopedia.

https://www.investopedia.com/articles/investing/053115/how-central-banks-control-

supply-money.asp