Inflation describes
a situation where a consistent and persistent [sustained] rise in the
percentage of general price levels over a given period of time. It does
not mean that all prices are moving to the same extent, or even in the same direction.
Some prices may be rising very sharply, others may be rising very little and a
few may be falling. Inflation is taking place when prices, on average, are
rising. Inflation may also be described as a situation where the value of
money is falling.
Purchasing power is the
amount of goods or services that can be purchased with a unit of currency. For
example, if you had taken one dollar to a store in the 2000s, you would have
been able to buy a greater number of items than you would today, indicating
that you would have had a greater purchasing power in the 2000s than that of
today.
When
prices are rising, the purchasing power of the currency is falling. It will buy
fewer and fewer goods and services. In order to measure the rate of
inflation it is necessary to measure the rate at which the prices are changing.
This is done by an index of price (index number).
There
are different reasons for inflation.
They are (1) Demand pull inflation, (2) Cost push
inflation, (3) increase in money supply and (4) Imported
inflation.
Increase in money supply may also cause inflation. The
money supply is meant the total amount of money which belongs to the people of
country in a given period of time. It is also considered that the prices of
goods and services depend on (rely on) the total supply of money and the rate at which money changes in hands
of the people (velocity of supply of
money).
When
a country is importing products from another country where they are
experiencing inflation, along with the products the inflation also will be
imported to the importing country. These can also be factors which cause
inflation.
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