INFLATION

Lujain Khaled
Grade 11A
WHAT IS
INFLATION?
Inflation is a rise in prices, which can be translated as the
decline of purchasing power over time. The rate at which
purchasing power drops can be reflected in the average
price increase of a basket of selected goods and services
over some period of time.
UNDERSTANDING
INFLATION
While it is easy to measure the price changes of individual products over time, human
needs extend beyond just one or two products. Individuals need a big and diversified
set of products as well as a host of services for living a comfortable life. They include
commodities like food grains, metal, fuel, utilities like electricity and transportation,
and services like healthcare, entertainment, and labor.

Inflation aims to measure the overall impact of price changes for a diversified set of
products and services. It allows for a single value representation of the increase in the
price level of goods and services in an economy over a period of time.

Prices rise, which means that one unit of money buys fewer goods and services. This
loss of purchasing power impacts the cost of living for the common public which
ultimately leads to a deceleration in economic growth. The consensus view among
economists is that sustained inflation occurs when a nation's money supply growth
outpaces economic growth.
 CAUSES OF INFLATION
An increase in the supply of money is the root of inflation, though this can play out through different mechanisms
in the economy. A country's money supply can be increased by the monetary authorities by:

• Printing and giving away more money to citizens

• Legally devaluing (reducing the value of) the legal tender currency
• Loaning new money into existence as reserve account credits through the banking system by purchasing
government bonds from banks on the secondary market (the most common method)

In all of these cases, the money ends up losing its purchasing power. The mechanisms of how this drives inflation
can be classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation.
DEMAND-PULL
EFFECT
Demand-pull inflation occurs when an increase in the supply of
money and credit stimulates the overall demand for goods and
services to increase more rapidly than the economy's production
capacity. This increases demand and leads to price rises.

When people have more money, it leads to positive consumer

sentiment. This, in turn, leads to higher spending, which pulls
prices higher. It creates a demand-supply gap with higher demand
and less flexible supply, which results in higher prices.
COST-PUSH EFFECT
Cost-push inflation is a result of the increase in prices working through the
production process inputs. When additions to the supply of money and credit are
channeled into a commodity or other asset markets, costs for all kinds of intermediate
goods rise. This is especially evident when there's a negative economic shock to the
supply of key commodities.

These developments lead to higher costs for the finished product or service and work
their way into rising consumer prices. For instance, when the money supply is
expanded, it creates a speculative boom in oil prices. This means that the cost of
energy can rise and contribute to rising consumer prices, which is reflected in various
measures of inflation.
 WHAT CAUSES INFLATION?
• There are three main causes of inflation: demand-pull inflation, cost-push inflation, and built-in inflation.

• Demand-pull inflation refers to situations where there are not enough products or services being produced to
keep up with demand, causing their prices to increase.
• Cost-push inflation, on the other hand, occurs when the cost of producing products and services rises, forcing
businesses to raise their prices.
• Built-in inflation (which is sometimes referred to as a wage-price spiral) occurs when workers demand higher
wages to keep up with rising living costs. This in turn causes businesses to raise their prices in order to offset
their rising wage costs, leading to a self-reinforcing loop of wage and price increases.
WHAT CAUSES
INFLATION?
There are three main causes of inflation: demand-pull inflation, cost-push
inflation, and built-in inflation.
• Demand-pull inflation refers to situations where there are not enough
products or services being produced to keep up with demand, causing
their prices to increase.
• Cost-push inflation, on the other hand, occurs when the cost of
producing products and services rises, forcing businesses to raise their
prices.
• Built-in inflation (which is sometimes referred to as a wage-price spiral)
occurs when workers demand higher wages to keep up with rising living
costs. This in turn causes businesses to raise their prices in order to
offset their rising wage costs, leading to a self-reinforcing loop of wage
and price increases.
WHAT ARE THE EFFECTS
OF INFLATION?
Inflation can affect the economy in several ways. For example, if inflation causes a
nation’s currency to decline, this can benefit exporters by making their goods more
affordable when priced in the currency of foreign nations.

On the other hand, this could harm importers by making foreign-made goods more
expensive. Higher inflation can also encourage spending, as consumers will aim to
purchase goods quickly before their prices rise further. Savers, on the other hand,
could see the real value of their savings erode, limiting their ability to spend or invest
in the future.
 IS INFLATION GOOD OR BAD?
• Too much inflation is generally considered bad for an economy, while too little inflation is also considered
harmful. Many economists advocate for a middle ground of low to moderate inflation, of around 2% per year.

• Generally speaking, higher inflation harms savers because it erodes the purchasing power of the money they
have saved; however, it can benefit borrowers because the inflation-adjusted value of their outstanding debts
shrinks over time.
MY POV. ON
INFLATION
Monetary policy might be adjusted to limit
inflation. Monetary policy will raise interest
rates, reducing buying power and, as a
result, lowering aggregate demand. Lower
demand means lower prices, and
consequently lower inflation.