“Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.” Central banks endeavour to put an end to grave inflation, along with drastic deflation, striving to keep the extravagant growth of prices at the lowest level. For example, if there is 5% inflation in a specific country and the price of sugar is usually £3, it will spontaneously escalate from £3 to £3.15. Every government’s tries to keep a low inflation rate but there are some conflicts that may be caused such as conflicts between inflation and unemployment or a conflict between inflation and economic growth. Inflation can be a positive figure or a negative figure. A positive figure on inflation means that there is a rise in general price level while a negative figure means that there is a fall in general price level. The latter is also known as ‘deflation’ but it occurs rarely. This essay focuses on the different types of inflation, the advantage of inflation, the effects of it and the ways to reduce the inflation rate.
There are 5 different types of inflation; demand-pull inflation, cost-push inflation, wage push inflation, imported inflation and temporary factors. Demand-pull inflation is when the aggregate demand is higher than aggregate supply. The economy will rather grow faster than the long run trend rate of growth because of the demand-pull inflation. This causes the price to rise, as according to the law of demand and supply, there is an indirect relationship between demand and supply which means that when demand increase and supply remains unchanged, a shortage occur which leads to firms increasing their prices. The second type of inflation is cost-push inflation, this occurs when the cost of production increases. The cost of production increases due to rise in the price of raw materials or wages. The third type of inflation is wage push inflation. This is a combination of demand-pull and...
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