Inflation

In economics, inflation is a rise in the general prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money and a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Inflation’s effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in future.

Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions) and encouraging investment in non-monetary capital projects. As a result, prices go up. In simple terms, inflation is a sharp upward movement in the price level. This situation is painful for people with low incomes.

There are many causes of inflation. Hoarding, black marketing lack of industry, lack of production, unstable economic and political conditions, are some of the major causes of inflation. An efficient government system can control inflation through the implementation of strict laws.