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, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities,
The law of supply and demand therefore dictates that prices will rise. War or other events causing instability. However. This involves the appropriate 'price' of money which. Decreases in the availability of limited resources such as food or oil. In addition. Increases in production costs. This 'price' indicates the return which has to bepre-determined to hold back the printing presses. the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. in place of some other assets which offer the market interest rate. This is because there is a decline in its price competitiveness in the global market. in this case. If there is a lot of money going around. A high rate of inflation can cause the following economic impediments: . This is called a loose or expansionary monetary policy. Effects of Inflation One of the economic effects of inflation is the change in the marginal cost of producing money. its balance of trade is likely to move in an unfavorable direction. is the nominal rate of interest. Causes of inflation Printing too much money. Tax rises.as well as to growth in the money supply. if a country has a higher rate of inflation than other countries. then supply is plentiful compared to the products you can buy with that money. Declines in exchange rates.
416. The value of investments is destroyed over time. Other widely used price indices for calculating price inflation include the following: Producer price indices . usually the Consumer Price Index. It is economically disastrous for lenders. For instance. and in January 2008 it was 211. High levels of inflation tend to lead to economic stagnation. Non-uniform inflation can lead to heavy competition in the global market and threaten the existence of small economies.S. consumers rose by approximately four percent in 2007. Measures Inflation is usually estimated by calculating the inflation rate of a price index.080. The formula for calculating the annual percentage rate inflation in the CPI over the course of 2007 is The resulting inflation rate for the CPI in this one year period is 4. the U. Arbitrary governmental control of the economy to control inflation can restrain economic development of the country. Consumer Price Index was 202. meaning the general level of prices for typical U. The inflation rate is the percentage rate of change of a price index over time. in January 2007.28%. The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer".S.
Measures to Control Inflation The central banks. There is also typically a delay between an increase in the PPI and any eventual increase in the CPI. monetary authorities or finance ministries of most nations have the authority to take economic measures to control rising inflation by regulating the following factors: Reducing the central bank interest rates and increasing bank interest rates. Because core inflation is less affected by short run supply and demand conditions in specific markets. an earlier version of the PPI was called the Wholesale Price Index.(PPIs) which measures average changes in prices received by domestic producers for their output. which measure the price of a selection of commodities. which removes the most volatile components (such as food and oil) from a broad price index like the CPI. In India and the United States. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee. it can be difficult to detect the long run trend in price levels when those prices are included. . or offset by increasing productivity. Core price indices: because food and oil prices can change quickly due to changes in supply and demand conditions in the food and oil markets. profits. Commodity price indices. This could be "passed on" to consumers. or it could be absorbed by profits. This differs from the CPI in that price subsidization. Therefore most statistical agencies also report a measure of 'core inflation'. Producer price index measures the pressure being put on producers by the costs of their raw materials. and taxes may cause the amount received by the producer to differ from what the consumer paid. central banks rely on it to better measure the inflationary impact of current monetary policy.
Controlling prices and wages. . Providing cost of living allowance to citizens in order to create demand in the market. Regulating fixed exchange rates of the domestic currency.