What Is Inflation?

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

There are a few theories that claim to explain inflation, and two of them are:

1. Cost-push inflation: This type of inflation is caused by a sudden rise in the cost of production while demand for products or services decreases or remains the same. The additional production cost is transferred to buyers in the form of an increase in retail price.

2. Demand-Pull Inflation: This type of inflation can be 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 are available. This results in price increases, which will remain until supply can finally match demand and maintain the balance. This usually happens to growing economies.

Inflation can be calculated using the Consumer Price Index. Economists track the average prices of some basic goods and services in order to measure the CPI. These "market baskets" of goods and services are monitored and compared over time to determine the price index. Inflation calculators compute the trend of inflation through the years. Below are some websites that provide online inflation calculators and information about the CPI:

  • Cost Estimating Web Site: This NASA site calculates inflation rates between the years 1913 and 2004.
  • Inflation Calculator: This DollarTimes tool gives an approximate calculation of the relative buying power of the U.S. dollar between any two years from 1914 to 2009.
  • US Inflation Calculator: This calculator measures the buying power of the dollar over time. The site also includes articles on inflation.
  • Tom's Inflation Calculator: This tool approximates inflation using the U.S. Retail Price Inflation from 1666 to 2070.

The CPI is used to evaluate the cost of living framework, which measures the change in consumer spending that is required to reach a certain standard of living. Inflation has a large impact on the cost of living in any given country. The following websites illustrate how inflation is affecting the global market, and report the cost of living in different countries:

  • List of Countries by Inflation Rate: This article shows the inflation rates of 190 countries, based on information from the CIA World Factbook.
  • Inflation Rates: This page lists the inflation rates of selected countries, with links to information about the economic status of some of the countries.
  • Global/World Cost of Living Rankings 2010/2011: This page shows the cost of living in some countries and destinations. It includes the Mercer Cost of Living Survey and the 2008 Worldwide Rankings.
  • Cost of Living Guides: This page gives ExpatForum.com's cost of living statistics for 19 countries, as well as other related information for expatriates.

A sudden increase in the price of commodities and services has a domino effect on the economy. The depreciation of money results in less buying power for the average consumer, and this ultimately brings about a decrease in demand for products and services. Manufacturing firms are compelled to lay off workers. The fear of inflation also leads to hoarding: consumers and retailers buy excessive amounts of certain products to keep them 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 more easily adjust to changes. Lenders, on the other hand, are 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 it and take the necessary precautions to cope with it. Below are two articles about potential future inflation, and about how to resolve it or minimize its negative effects:

Inflation causes a lot of problems to a country's economy, and it affects many people in a negative way. It is usually not a problem that can be solved quickly or easily, but if a country employs the right strategies to control it, it can be resolved.

About The AuthorAbout the Author :
Written by Chris Fletcher (aka the Lease Guy). Chris is a senior account executive at Crest Capital, where he manages vendor finance programs for manufacturers and dealers of equipment, vehicles, and software. He's also an active Twitterer—check out his page if you follow financial topics and current events in the world of finance.