Inflation
If you're about to purchase a new home, borrow money or even apply for a new credit card through your local bank, you're probably keeping an eye on the inflation rate. Inflation has a large effect on consumers and businesses and can either encourage or deter investment depending on its rate.
But what is inflation and how can it be measured? What are the common effects high inflation has on an economy? This article looks at how inflation occurs and how it affects a country's residents.
The term “inflation” is used to describe the rising prices of goods and services within an economy. Inflation rates can be measured by economists by comparing the prices of a specific good, for example, the price of toothpaste, over two points in time. If no improvements in quality have been made yet the price is higher, this is inflation.
The rate of inflation is most commonly measured in Western countries by a Consumer Price Index or CPI. The CPI measures the cost of commonly purchased consumer items such as food products and keeps these statistics on an annual basis. The rate of inflation can be calculated from the CPI which shows how much the price of goods has risen over the years.
What does inflation mean for the average person? What inflation is a reduction in the value of each dollar you spend. So simply put, if goods and services cost more, you will get less for your dollar. This depreciation of the dollar has a strong impact on people that live on fixed incomes, for example, retired people. They are able to buy less each month which will ultimately impact upon their standard of living.
There are several methods that can be used to stop inflation. One of the most common is to use a central or reserve bank to increase interest rates. High interest rates mean less money is available to the economy at large. Another method, usually only popular in times of war, is instituting wage controls and price controls. This can help to stabilize the economy and bring down a soaring inflation rate in conjunction with other monetary policies.
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Banking - Business Finances - Economics - Insurance - Investing
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