What is Inflation?

Inflation is a major concern of global economists, and it affects people from all walks of life. It refers to the measure or rate by which the costs of goods and services rise, and the purchasing power declines. As prices increase, monetary value decreases, and therefore, consumers will spend less on goods and services.

There are a few theories that point to the cause of inflation, and two of them are:

1) Cost-Push Inflation – a sudden rise in the cost of production, with demand for products or services decreasing or remaining the same. The additional cost will be transferred to buyers in the form of increase in retail price.

2) Demand-Pull Inflation – described as “too much money, too few goods”. It happens when there is a shortage of supply, and the economy demands more goods and services than what is available. This results in price increases, which will remain until the supply can finally match up to the demand and maintain the balance. This usually happens to growing economies.

Inflation can be calculated by the Consumer Price Index (CPI) . The average prices of some basic goods and services that make up the market baskets are used to measure CPI. The market baskets are monitored and compared over time to determine the price index. Inflation calculators are used to monitor and determine the trend of inflation through the years. Below are some websites that provide online inflation calculators and information about CPI:

• Cost Estimating Web Site (NASA) : Computes inflation rates between the years 1913 and 2004
• DollarTimes – Inflation Calculators : Gives approximate calculation of the relative buying power of the United States dollar between any two years from 1914 to 2009
• US Inflation Calculator : Measures the buying power of the dollar over time. Includes articles on inflation
• Tom’s Inflation Calculator : Approximation of inflation using the U.S. Retail Price Inflation from 1666 to 2070

The CPI is used to further evaluate the cost of living framework, which measures the change in consumer spending that is required to reach a certain level of the standard of living. With the effects of inflation, the cost of living in any given country is also affected. Illustrations of the trends of inflation rates in the global market and reports of the costs of living in different countries are available:

• List of Countries and Their Inflation Rates : Shows inflation rates of 190 countries based on the CIA World Factbook
• Inflation in Countries : List of inflation rates of selected countries in the world, with links to information about some countries’ economic status
• Global/World Cost of Living Rankings 2008/2009 : Shows the costs of living of some countries and destinations. Includes Mercer Cost of Living Survey and 2008 Worldwide Rankings
• International Cost of Living Guides from the Expat Forum : List of cost of living in 19 countries and other related information for expatriates

The sudden increase of the prices of commodities and services has a domino effect on the general public. The depreciation of money results in less buying power, and this will ultimately bring about a decrease in demand for products and services. As such, manufacturing firms will be compelled to lay off workers. The fear of inflation also results in hoarding, where consumers and retailers will buy excessive products to keep for future use, so that they will not have to pay high prices when inflation occurs. Those who are not earning fixed incomes are less affected by inflation because they can easily make adjustments to changes. The lenders are also gravely affected since lower interest rates may make loans more favorable to borrowers.

The fear of future inflations hangs in the air, and economists are trying to foresee and take the necessary precautions to cope with it. Below are some articles about potential inflation in the future, and how to resolve it or minimize its negative effects:

• Perspectives and Lessons from a Country’s Experience with Inflation Targeting : Speech of Mr. Murillo Portugal, Deputy Managing Director of IMF on inflation targeting and other issues
• Potential Future Hyperinflation : Article discussing the causes and effects of inflation, including analysis on future economic status

Inflation can cause a lot of problems to a country’s economy, and it can affect many people in a negative way. It is usually not a problem that can be solved in a short time, but if a country employs the right strategies to control it, it can be resolved.