What is inflation?
Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.
― Sam Ewing
it is the rate of hike in prices for goods and services over a period of time. Consumer Price Index and the Retail Price Index are the measures used for inflation form the various other measures. These indexes look on what we are paying to buy goods and services over a time period, even we are buying bread, cinema ticket, vegetables, drinks etc. It monitors everything.
This is a Rate
The inflation is a rate in %age. if we are paying GBP 11 over the price of GBP 10 to buy a product after a year. It means prices are inflated with 10%. A consolidated data of changes is effected in indexes and which helps to measure an overall change rate. That is Inflation.
Measures to Control Inflation
Inflation effects economy with its influence over deciding the rate of interest, liquidity of money in the market. Governments and banks control the liquidity of the money into economy to increase or decrease the inflation. If there is more liquidity in the market, people will have more money in hand which leads to increase in demand and law of economics says when there is more demand less supply prices increases. This increase will lead to increase the production and people will earn more money. This cycle will lead to increase the Inflation rate and get the economy from the recessions. If inflation is more then banks increase the lending and deposit rate. People discourage to borrow and encouraged to deposit money in banks to earn good interests. It will reduce the liquidity into markets. Then demand is low and as per law prices starts reducing. Which leads to decrease in inflation.
This is one of the measures with helps to manage the inflation trends in future. But this is not the only one there are may other factors effecting the control over the rate of inflation.
Inflation is important for the growth of economy, it has three types
When Prices increased upto 2% in a year.
When inflation is between 3-10% a year it is called walking
When it is more than 10% a year.
When prices are increase at very high, increase upto 50% in a month. It happened in Germany in the 1920s, and in Zimbabwe in the 2000s.
When economy of a country is not growing but prices are increasing.
The rate of inflation calculated on all the goods and services except Food and Energy.
As the name suggests, it is opposite of the inflation, when prices came down instead of increasing.
When wages rise faster than the cost of living. The excess money leads to create more demand.
Inflation plays very important role in growth of an economy. It should be well managed by the Governments and Core Financial Institutions of the country. It may lead a country to a super power or lead a country to a civil war.