WHAT IS INFLATION?

Inflation refers to the ongoing rise in the

overall prices of goods and services in an
economy. This gradual increase diminishes
the buying power of money, resulting in the
same amount of money being able to
purchase a reduced quantity of goods and
services. Central banks commonly strive to
control inflation within a specific range to
foster economic stability and growth.
 TYPES OF INFLATION
1. Demand-pull inflation:
Results from increased demand for goods and services, outpacing their supply.

2. Cost-push inflation:
Triggered by rising production costs, such as higher wages or increased raw
material prices, leading to higher prices for final products.
3. Built-in inflation:
Also known as wage-price inflation, it occurs when workers demand higher wages,
and businesses pass those increased labor costs on to consumers in the form of
higher prices.
4. Hyperinflation
An extremely high and typically accelerating inflation, leading to a rapid and
excessive increase in prices, often rendering the country's currency nearly
worthless.
5. Core inflation:
Focuses on the long-term trend of price levels by excluding certain volatile items
like food and energy.
6. Structural inflation
This results from supply-side constraints, such as shortages of key commodities
or inefficiencies in production processes, leading to sustained increases in prices.
7. Creeping inflation:
This refers to a gradual increase in prices over an extended period, often at a
relatively low rate.
 WHAT CAUSES INFLATION?
Inflation occurs when the demand for goods and services
exceeds their availability, or when production costs rise. If more
money is introduced into the economy without a corresponding
increase in goods, prices go up. External events and people's
expectations can also influence inflation. Central banks work to
balance these factors for stable economic conditions.
 CRITERIA OF INFLATION
Inflation is typically measured using various indices that track the changes in the
prices of a basket of goods and services over time. The most common criteria for
assessing inflation include the Consumer Price Index (CPI), Producer Price Index
(PPI), and the GDP deflator. These indices help quantify and analyze the extent of
price changes in an economy.

CONSUMER PRICE INDEX (CPI):

Measures the average change in prices paid by consumers for a basket of
goods and services, reflecting the cost of living. It includes items like food,
housing, and transportation, providing insight into how inflation affects
everyday expenses for consumers.
Producer Price Index (PPI):
Measures the average change in prices received by producers for their goods and
services. It helps track inflation at the production level, offering insights into cost
changes for businesses, which can influence consumer prices.

GDP Deflator:

Compares the current value of all goods and services produced in a country to the
value of the same goods and services in a base year. It reflects changes in the
overall price level of the entire economy, serving as an indicator of inflation or
deflation within the Gross Domestic Product (GDP).
 ADVANTAGE OF INFLATION
Moderate inflation can have some advantages. It encourages
spending as people anticipate rising prices, fostering economic
growth. Debtors may benefit as they repay loans with less valuable
currency. Additionally, central banks often target a low and stable
inflation rate to avoid deflationary risks. However, excessive inflation
can erode purchasing power, disrupt economic planning, and create
uncertainty, balancing the advantages of inflation against potential
drawbacks is crucial for economic stability.
 DISADVANTAGE OF INFLATION
Inflation poses several disadvantages. It erodes the purchasing
power of money, reducing the value of savings. Uncertain and
high inflation rates can hinder economic planning and distort price
signals. Fixed-income earners and savers may experience
reduced real income. Hyperinflation can lead to economic
instability and social unrest. Striking a balance to avoid both
inflation and deflation is essential for maintaining a stable and
thriving economy.
 WHAT IS DEFLATION?
Deflation is the sustained decrease in the general price level of
goods and services. It happens when there's a reduction in
consumer demand, leading to lower prices. While falling prices
may seem beneficial, deflation can harm the economy by
discouraging spending, investment, and contributing to
unemployment and economic stagnation.
 Strategic Deflation:
Triggered by rising production costs, such as higher
wages or increased raw material prices, leading to
higher prices for final products.
TYPES Circulation Deflation:
OF This kind develops as a result of a nation's

DEFLATION unpredictable economic circumstances. Circulation

deflation happens when a stable economy is going
through a slowdown during its transition period.
Such circumstances will undoubtedly worry the
general population.
 WHAT CAUSES DEFLATION?
Deflation is caused by factors like decreased consumer
demand, falling production costs, reduced wages, credit
contractions limiting spending, and declines in the value of
assets. These factors create an environment where prices
decrease, leading to economic challenges such as
unemployment and stagnation.
 CRITERIA OF DEFLATION
The criteria for identifying deflation involve monitoring
key economic indicators:

CONSUMER PRICE INDEX (CPI):

A decrease in the CPI indicates falling prices for a basket of
goods and services, signaling deflationary pressures
affecting consumers.
 PRODUCER PRICE INDEX (PPI):
A decline in the PPI suggests reduced prices received by
producers, indicating deflation at the production level.

GDP DEFLATOR:
Negative values in the GDP deflator reflect an overall
decrease in the prices of goods and services produced in
the economy, signaling deflationary tendencies.
 ADVANTAGE OF DEFLATION
While mild deflation can lower prices, benefiting consumers in
the short term, it often brings more disadvantages. Deflation
discourages spending as consumers anticipate lower prices,
hindering economic growth. It increases the real burden of debt,
making it harder for borrowers to repay loans. Businesses may
cut production and jobs, leading to unemployment. Deflation can
trigger a cycle of falling demand and economic contraction,
posing significant challenges for overall economic health.
 DISADVANTAGE OF DEFLATION
Deflation's primary disadvantage lies in its potential to hinder
economic growth. Falling prices may lead consumers to
postpone spending, causing decreased demand. The real value
of debts increases, posing challenges for borrowers. Businesses
may cut production and jobs, contributing to unemployment.
Persistent deflation can create a cycle of reduced demand,
lower investment, and economic contraction, negatively
impacting overall economic health and stability.
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