Why is inflation occurs?
Inflation occurs when there are changes in the demand and supply of goods and services. If inflation occurs, each dollar of income will buy fewer goods and services than before, which inflation is positive. When the price level of goods and services rises, the value of currency reduces.
What factors affect the inflation rates?
Why is inflation occurs?
Inflation occurs when there are changes in the demand and supply of goods and services. If inflation occurs, each dollar of income will buy fewer goods and services than before, which inflation is positive. When the price level of goods and services rises, the value of currency reduces.
Inflation occurs when there are changes in the demand and supply of goods and services. If inflation occurs, each dollar of income will buy fewer goods and services than before, which inflation is positive. When the price level of goods and services rises, the value of currency reduces.
There are two main causes of inflation such as demand-pull inflation and cost-push inflation. (Taylor and Weerapana, 2012)
Demand-pull inflation is caused by sources of an increase in aggregate demand. (Sloman et al, 2012) It starts when there is a rise in demand for a good or services, but supply stays the same. In this case, buyers will be willing to pay more to satisfy their demand. Demand-pull inflation is likely when there is full employment of resources. (Refer Chart 1)
Sources of a decrease in aggregate supply operated by increasing costs, and the resulting inflation is called cost-push inflation. This occurs when the supply of goods or services is limited for some kind of reasons when the demand stays the same. As a result, it can create wage inflation when the supply of labor is not enough to meet the demand. (Refer Chart 2)
There are two main causes of inflation such as demand-pull inflation and cost-push inflation. (Taylor and Weerapana, 2012)
Demand-pull inflation is caused by sources of an increase in aggregate demand. (Sloman et al, 2012) It starts when there is a rise in demand for a good or services, but supply stays the same. In this case, buyers will be willing to pay more to satisfy their demand. Demand-pull inflation is likely when there is full employment of resources. (Refer Chart 1)
Sources of a decrease in aggregate supply operated by increasing costs, and the resulting inflation is called cost-push inflation. This occurs when the supply of goods or services is limited for some kind of reasons when the demand stays the same. As a result, it can create wage inflation when the supply of labor is not enough to meet the demand. (Refer Chart 2)
Demand-pull inflation is caused by sources of an increase in aggregate demand. (Sloman et al, 2012) It starts when there is a rise in demand for a good or services, but supply stays the same. In this case, buyers will be willing to pay more to satisfy their demand. Demand-pull inflation is likely when there is full employment of resources. (Refer Chart 1)
Sources of a decrease in aggregate supply operated by increasing costs, and the resulting inflation is called cost-push inflation. This occurs when the supply of goods or services is limited for some kind of reasons when the demand stays the same. As a result, it can create wage inflation when the supply of labor is not enough to meet the demand. (Refer Chart 2)
Inflation Rate in the United States
(Click the image to view larger)
The inflation rate in the United States was recorded at 1.20% in September of 2013, as reported by the Bureau of Labor Statistics (BLS) on 30 October 2013. (USInflation.org, 2013) Based on the chart above, US inflation on the last 12 months has climbed by 1.5% after advancing 2.0% in July 2013. As reported by the BLS for 2013, the past US inflation rates include an annual increase of 1.8% in June, 1.4% in May, 1.1% in April, 1.5% in March, 2.0% in February and 1.6% in January.
The Consumer Price Index (CPI) is among the most commonly-used measures of inflation in the United States. The CPI is used to measure the changes in prices experienced by the average consumers in the economy. Economists and central bankers will often subdivide the CPI into "core inflation", which is a measure that excludes the price of food and energy. (Investopedia, 2013)
The American CPI shows the change in prices of a standard package of goods and services, which the American households will be purchasing it for consumption. In order to measure the inflation, an assessment is made of how much the CPI has risen in percentage terms over a given period of time as compared to the CPI in a preceding period. When the prices have fallen, it is deflation.
Inflation rate in United Kingdom
(Click the image to view larger)
The rate of inflation is measured by the annual percentage change in the consumer prices. For instance, the British government will be setting an inflation target of 2% or 3% each year using the Consumer Price Index (CPI). Moreover, it is the job for the bank to set the interest rates. Therefore, the aggregate demand is within control, as the bank is independent of the government with control of the interest rates that is free from political intervention. In fact, the bank is also concerned about the economy.
How to calculate inflation rate?
The main measure of inflation in the United States is the Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (BLS). (McConnell et al, 2012) Inflation measures the change in price levels over a period of time, as measured by the Consumer Price Index (CPI).
The composition of the market basket for the CPI is based on the spending patterns of urban consumers in a specific period. The rate of inflation is equal to the percentage growth of CPI from one year to the next. The September-September rates of inflation in the United States between year 2012 and 2013 is as follows:
234.149-231.407 x 100
231.407
=1.18%
(US Inflation Calculator, 2013)
What are the effects of inflation?
There is a fall in purchasing power of
the values of money that the bank has been lent out, which means that the value
of money to be repaid falls in terms of purchasing power falls. Maybe the
interest rate of the bank may raise but the exchange rate may fall, due to the
purchasing power of the money is not high. This can be very damaging the poor
people. There will be hardships for the poor people and the fixed income
salaried household. People may be left worse off when the prices rise and their
wages do not. Besides, the value of investment can be reduced when the returns
proved that it is insufficient to compensate them for inflation. When the
purchasing value of the money is low, less businesses and investors would like
to make long-term contract, as these do not benefits them. In turn, the
long-term investment is also discouraged. So, central bank plays an important
role. It should control the money supply growth.
(Peter, 2007)
Apart from that, if deflation occurs,
the average prices are falling and various economic effects will be resulting.
For instance, people will not put off their spending when they expect the
prices to fall. During deflation, the demand for liquidity goes up and the
purchasing power of money increases. Investment will fall, leading to further reductions
in aggregate demand. In fact, the real value of lands to be repaid may rise.
Unemployment may increase, as the stock market crash sucked all the liquidity
out of the market place and the economy contracted. When the people lose their
jobs, the banks then stopped lending money to them.
(Reisman, 2009)
How government control the inflation?
The government uses a few numbers of policies to control the inflation such as demand side policies, supply side policies and exchange rate policies.
Demand side policies includes deflationary fiscal policy. This policy involves an increase in taxes and lowering of government spending. Increasing in taxes will result in lowering the disposable income for household and thus less consumption. Furthermore, increased taxes will result in lowering the profits of the firms and thus less investment by firms. This is the ways to lower the aggregate demand in the economy. Besides, deflationary monetary policy, which is also includes in demand side policies also can control the inflation. This policy involves in rising the interest rates and reducing the money supply. Higher interest rates means higher loan and mortgage repayments. Thus, deter household and firms to borrow, leading to a fall in consumption and investment respectively.
Supply side policies is one the policies in controlling the cost push inflation. It includes all those policies, which aim at improving the efficient supply of goods and services. For example, have more competition in all industries by removing entry barriers, thus leading to more efficiency.
Exchange rate policies, which is used to control the imported inflation involves in increasing the value of currency to reduce the imported inflation. Increasing currency rate will also lead to a fall in demand for exports.
How inflation affect consumer purchasing power?
Purchasing power is an economic theory
relating to an individual ability to buy goods or services in the economic
market place. The relationship between purchasing power and inflation are
inversely proportional, meaning as when the inflation increases consumer prices over a period of time,
the consumer purchasing power will be reduces. This is because when there is
inflation of the price, the price level will be higher and people’s ability to
pay for goods or services might decrease. The concept at a basic level says if
an employee's wages remain steady, but the cost of goods increases, then the
employee can only afford fewer goods and services.
Inflation Rate in the United States
The inflation rate in the United States was recorded at 1.20% in September of 2013, as reported by the Bureau of Labor Statistics (BLS) on 30 October 2013. (USInflation.org, 2013) Based on the chart above, US inflation on the last 12 months has climbed by 1.5% after advancing 2.0% in July 2013. As reported by the BLS for 2013, the past US inflation rates include an annual increase of 1.8% in June, 1.4% in May, 1.1% in April, 1.5% in March, 2.0% in February and 1.6% in January.
The Consumer Price Index (CPI) is among the most commonly-used measures of inflation in the United States. The CPI is used to measure the changes in prices experienced by the average consumers in the economy. Economists and central bankers will often subdivide the CPI into "core inflation", which is a measure that excludes the price of food and energy. (Investopedia, 2013)
The American CPI shows the change in prices of a standard package of goods and services, which the American households will be purchasing it for consumption. In order to measure the inflation, an assessment is made of how much the CPI has risen in percentage terms over a given period of time as compared to the CPI in a preceding period. When the prices have fallen, it is deflation.
Inflation rate in United Kingdom
The rate of inflation is measured by the annual percentage change in the consumer prices. For instance, the British government will be setting an inflation target of 2% or 3% each year using the Consumer Price Index (CPI). Moreover, it is the job for the bank to set the interest rates. Therefore, the aggregate demand is within control, as the bank is independent of the government with control of the interest rates that is free from political intervention. In fact, the bank is also concerned about the economy.
How to calculate inflation rate?
The main measure of inflation in the United States is the Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (BLS). (McConnell et al, 2012) Inflation measures the change in price levels over a period of time, as measured by the Consumer Price Index (CPI).
The composition of the market basket for the CPI is based on the spending patterns of urban consumers in a specific period. The rate of inflation is equal to the percentage growth of CPI from one year to the next. The September-September rates of inflation in the United States between year 2012 and 2013 is as follows:
The American CPI shows the change in prices of a standard package of goods and services, which the American households will be purchasing it for consumption. In order to measure the inflation, an assessment is made of how much the CPI has risen in percentage terms over a given period of time as compared to the CPI in a preceding period. When the prices have fallen, it is deflation.
Inflation rate in United Kingdom
(Click the image to view larger)
The rate of inflation is measured by the annual percentage change in the consumer prices. For instance, the British government will be setting an inflation target of 2% or 3% each year using the Consumer Price Index (CPI). Moreover, it is the job for the bank to set the interest rates. Therefore, the aggregate demand is within control, as the bank is independent of the government with control of the interest rates that is free from political intervention. In fact, the bank is also concerned about the economy.
How to calculate inflation rate?
The main measure of inflation in the United States is the Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (BLS). (McConnell et al, 2012) Inflation measures the change in price levels over a period of time, as measured by the Consumer Price Index (CPI).
The composition of the market basket for the CPI is based on the spending patterns of urban consumers in a specific period. The rate of inflation is equal to the percentage growth of CPI from one year to the next. The September-September rates of inflation in the United States between year 2012 and 2013 is as follows:
234.149-231.407 x 100
231.407
=1.18%
What are the effects of inflation?
There is a fall in purchasing power of the values of money that the bank has been lent out, which means that the value of money to be repaid falls in terms of purchasing power falls. Maybe the interest rate of the bank may raise but the exchange rate may fall, due to the purchasing power of the money is not high. This can be very damaging the poor people. There will be hardships for the poor people and the fixed income salaried household. People may be left worse off when the prices rise and their wages do not. Besides, the value of investment can be reduced when the returns proved that it is insufficient to compensate them for inflation. When the purchasing value of the money is low, less businesses and investors would like to make long-term contract, as these do not benefits them. In turn, the long-term investment is also discouraged. So, central bank plays an important role. It should control the money supply growth.
(Peter, 2007)
(Reisman, 2009)
(US Inflation Calculator, 2013)
What are the effects of inflation?
There is a fall in purchasing power of the values of money that the bank has been lent out, which means that the value of money to be repaid falls in terms of purchasing power falls. Maybe the interest rate of the bank may raise but the exchange rate may fall, due to the purchasing power of the money is not high. This can be very damaging the poor people. There will be hardships for the poor people and the fixed income salaried household. People may be left worse off when the prices rise and their wages do not. Besides, the value of investment can be reduced when the returns proved that it is insufficient to compensate them for inflation. When the purchasing value of the money is low, less businesses and investors would like to make long-term contract, as these do not benefits them. In turn, the long-term investment is also discouraged. So, central bank plays an important role. It should control the money supply growth.
(Peter, 2007)
Apart from that, if deflation occurs,
the average prices are falling and various economic effects will be resulting.
For instance, people will not put off their spending when they expect the
prices to fall. During deflation, the demand for liquidity goes up and the
purchasing power of money increases. Investment will fall, leading to further reductions
in aggregate demand. In fact, the real value of lands to be repaid may rise.
Unemployment may increase, as the stock market crash sucked all the liquidity
out of the market place and the economy contracted. When the people lose their
jobs, the banks then stopped lending money to them.
(Reisman, 2009)
How government control the inflation?
How inflation affect consumer purchasing power?
The government uses a few numbers of policies to control the inflation such as demand side policies, supply side policies and exchange rate policies.
Demand side policies includes deflationary fiscal policy. This policy involves an increase in taxes and lowering of government spending. Increasing in taxes will result in lowering the disposable income for household and thus less consumption. Furthermore, increased taxes will result in lowering the profits of the firms and thus less investment by firms. This is the ways to lower the aggregate demand in the economy. Besides, deflationary monetary policy, which is also includes in demand side policies also can control the inflation. This policy involves in rising the interest rates and reducing the money supply. Higher interest rates means higher loan and mortgage repayments. Thus, deter household and firms to borrow, leading to a fall in consumption and investment respectively.
Supply side policies is one the policies in controlling the cost push inflation. It includes all those policies, which aim at improving the efficient supply of goods and services. For example, have more competition in all industries by removing entry barriers, thus leading to more efficiency.
Exchange rate policies, which is used to control the imported inflation involves in increasing the value of currency to reduce the imported inflation. Increasing currency rate will also lead to a fall in demand for exports.
How inflation affect consumer purchasing power?
Purchasing power is an economic theory
relating to an individual ability to buy goods or services in the economic
market place. The relationship between purchasing power and inflation are
inversely proportional, meaning as when the inflation increases consumer prices over a period of time,
the consumer purchasing power will be reduces. This is because when there is
inflation of the price, the price level will be higher and people’s ability to
pay for goods or services might decrease. The concept at a basic level says if
an employee's wages remain steady, but the cost of goods increases, then the
employee can only afford fewer goods and services.
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