Topics: Inflation, Monetary policy, Recession Pages: 9 (3373 words) Published: January 26, 2013
What inflation is? Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Subsequently, it will cause purchasing power fall. In simple terms, it means that too much of money is chasing for one particular item. When too much of money is available, the seller may raise the price of which he is willing to sell. In the long run, inflation has the potential of erasing the purchasing power of the people. It is because when the basic needs such as food and energy prices are on the rise, people simply need to fork out more just to maintain their standard of living. There are different states of inflation. Firstly, hyperinflation is a very high rate of inflation, usually a rate in excess of 50%. Secondly, deflation is the decrease in the general price level of goods and services only when annual inflation is below 0% resulting in the real value of money. Hence, it is sometimes called “negative inflation”. Thirdly, disinflation is refers to a time when the rate of change of prices is falling while the inflation rate is positive. Lastly, stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time. Stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable. How to calculate inflation rate? Consumer Price Index (CPI) is used to measure for inflation, it measures price increases and decreases consumer goods and services on a monthly basis. When the Consumer Price Index goes up, it indicates an inflationary environment. Inflation will affect our living cost; it will cause our standard of living fall. This is because each Ringgit Malaysia buys less goods and services, so we have to spend more money to get the same goods and services. In an inflationary environment, some sectors of a society will gain and some of them will lose. Inflation will hurt those sectors such as fixed income earners and individuals. Inflation is bringing a lot of disadvantages to our life. Discussion

Causes and Effects of Inflation
Causes of inflation
Inflation is a condition where price of goods and services keep going up, eating away our standard of living. There is several reasons account for inflation: demand-pull inflation, cost-push inflation and expansion of money supply. First of all, demand-pull inflation is one of the main causes of inflation. Demand-pull inflation refers to the idea that the economy actual demands more goods and services than available. When there is an excess demand for goods and services, businesses will respond by raise prices to increase their profit margin. Demand pull inflation usually happened during economic boom, when there is an increase in aggregate demand. One of the factors that lead to demand pull inflation is the depreciation of the exchange rate. A depreciation of the exchange rate increases the price of imports and reduces the foreign price of exports. If consumers buy fewer imports and buy more domestic goods, while foreigners buy more exports, demand in the economy will rise. If the economy is already at full employment, it is hard to increase output and therefore prices are pulled upwards. A reduction in direct or indirect taxation will also lead to demand pull inflation. If taxes are reduced, consumers will have more disposable income, they tend to buy more goods and services and causing demand to rise. A reduction in indirect taxes such as taxes on goods and services will mean that a given amount of income will now able to buy a greater volume of goods and services. A growing economy might also contribute to demand pull inflation. When the economy is growing, people will feel more confident about the future and therefore spend more. When people feel...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Essay on Inflation and Financial Markets
  • Inflation and Its Impacts on Vietnam Essay
  • Inflation Essay
  • Consequences of Inflation Essay
  • Essay on Inflation
  • Essay about Inflation
  • inflation Essay
  • The Inflation Essay

Become a StudyMode Member

Sign Up - It's Free