Inflation is one of the most listened topics these days. Inflation can be defined as a sustained increase in the general price level. It is usually measured by the Retail Price Index (RPI). This is a weighted average of retail prices. To calculate it, goods and services are given different weights according to the percentage of income that households spend on them. Weights are determined by the results of the Family Expenditure Survey.
Inflation is caused by:
- Too much of demand in the economy. This is called demand pull inflation. Ex : if the demand increases for a certain product and if the producers are not able to produce enough of the product, then they will raise the prices.
- Higher costs forcing the firms to increase their prices. This is called cost push inflation. Ex: During the 1970s in Western Europe, oil prices increased due to increase in the cost of producing or buying oil.
- Due to excessive growth of money supply in the economy because of other factors such as low interest rates, etc.
Price Index is worked out by comparing the price of a representative basket of goods today compared to the base year using the equation:
Price Index = Present cost of a basket of goods/ cost of basket of goods in the base year × 100
Type of inflation:
·Creeping inflation: Creeping inflation is a slow inflation where the prices of goods are increased in a steady manner. The usual percentage is from 5-6%. This is usually seen in developed countries.
·Strato-inflation: Strato-inflation is a high inflation, where the prices of goods increase at an increased rate. The rates of inflation are usually between 10% to several hundred %. This phenomenon is usually seen in developing countries such as India, China, Brazil, etc.
·Hyper-inflation: Hyper-inflation is a very high form of inflation. The percentage increase ranges from several hundreds to several thousands. This is the worst form of inflation. Many developing countries in Africa such as Somalia, Zimbabwe, Ethiopia, etc are experiencing hyper-inflation for some years now.
Causes of Inflation:
The various causes of inflation can be sited as under
- Increased consumer spending throughgreater consumer confidence.
- Wage increase to employees which are not linked to higher productivity
- An increase in the cost of imported raw materials from foreign countries
- An increase in input prices because of monopoly power of suppliers.
These are some of the causes of inflation.
An interesting relation between wage rates and inflation has also been established. Higher wage demands without any increase in productivity lead to higher costs and then prices. Higher prices lead to higher wage demands.
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