What is inflation? Causes, consequences, and examples - GovtVacancy.Net

What is inflation? Causes, consequences, and examples - GovtVacancy.Net
Posted on 23-10-2022

What is inflation? Causes, consequences, and examples

Inflation is an economic concept that explains the persistent increase in the prices of products and services found in the market.

inflation concept

Inflation refers to the global and constant increase in the prices of goods and services in an economy in a given period of time. That is to say, it is a situation in which the cost to acquire a good or service is increasing.

types of inflation

  • Moderate inflation: This is when inflation increases slowly and, therefore, prices remain relatively the same throughout the year, not exceeding 10% in increases.

  • Galloping inflation: Refers to inflation that exceeds 10% per year. It is characterized by a relatively rapid increase and with a certain lack of control in prices.

  • Hyperinflation: It is the most serious type of inflation, characterized by a rapid increase and total lack of control in prices, exceeding limits of 1000% per year. It causes a considerable reduction of the patrimony of those affected.

  • Negative inflation: Also called deflation, it refers to the global and constant reduction in prices. It is the opposite of inflation, since everything becomes cheaper.

Causes of inflation

  • Demand Inflation: Occurs when demand is greater than supply. That is, when the ability to offer (through production or import) a certain product is less than customer demand, the price increases.

  • Cost inflation: It happens when the costs associated with the production of certain goods or services increase, and therefore, to offset these costs, the final sale price of the good or service increases proportionally. It is done so that companies or small merchants can maintain their profit margin.

  • Self-constructed inflation: Occurs when an increase in prices is forecast, so that, to anticipate such events, companies raise prices in advance.

Consequences of inflation

  • Decrease in purchasing power.

  • Less saving capacity.

  • Reduction of heritage.

  • Motivated to spend faster by the constant devaluation of the currency.

  • It affects the correct functioning of the economic system of a country.

  • Negative impact on personal and family finances.

Characteristics of inflation

  • Constant increase: The price of goods and services increase regularly.

  • The increase is global: These increases are usually general. That is, inflation affects the price of all goods and services.

  • It can be harmful or beneficial: Depending on the level of inflation, inflation can be unfavorable or beneficial. A low and stable degree of inflation is advantageous for an economy, but a high level is detrimental.

  • It has several levels of inflation: moderate inflation (0-9.99%), galloping inflation (10-1000%), and hyperinflation (>1000%).

examples of inflation

  • When at the beginning of the year, with $250 you could buy the basic food basket, but at the end of the same year, you can buy only half with the same amount of money.

  • When savings are diminished over time.

  • When the ability to acquire goods and services is considerably reduced, and whose problem is increasing as time goes by.

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