What is Inflation and why does it occur (Dec'13)

Q. What is Inflation and why does it occur (Dec'13)?

Inflation: In terms of economics, inflation can simply be defined as an elevation in the general price levels of services and goods in the economy over a particular period of time. Whenever the price level increases it causes depletion in the buying capacity of the currency, so inflation can also be defined as erosion in the purchasing power of money i.e. a loss of the real value of money in an internal medium of the exchange. One most common measure of price inflation is inflation rate. Inflation rate can be calculated as the yearly percentage change in the general price index (Consumer Price Index to be used most commonly) over time.

Reasons of inflation: Situation of inflation can occur at any time, and its occurrence depends upon a number of reasons. No specific cause is responsible for the occurrence of inflation. But some proposed reasons of the inflation are mentioned below-

1. If the production cost of various services and goods increases then naturally the prices of the final products would also increase. This leads into the situation of inflation.

2. Inflation occurs when industries and business houses increase the total prices of their services and goods in order to amplify their profit margins. This category of inflation is called as “administered price inflation” or “pricing power inflation”. This type of inflation is tedious to tackle because various industries and business houses have the complete authority/power of pricing their services and goods.

3. A situation of inflation occurs when a specific section of a mass industry increases the prices of its services and goods, because this step of a particular section of a mass industry will produce considerable effects on various other sections of industry also. For example- increase in the price of crude oil will spontaneously cause increase in the train fares and airfares.

4. A special category of inflation known as “Fiscal inflation” occurs, because of excessive spending of the government. Fiscal inflation was first observed in United Sates of America at the time of President Mr. Lydon Baines Johnson.

5. One another type of inflation is known as hyperinflation. Hyperinflation occurs during or after a heavy war. This inflation is also popular with the name of galloping inflation.

6. Another severe type of inflation is known as stagflation. It occurs in an economy which faces economic stagnation and high unemployment rate.

So we can say that inflation has some serious consequences on the economy as a whole. So the government should make some strict policies to curb inflation and thus help the country to have a stable economy.