Inflation

Term of the Day - 19 January 2024

Today’s Term is “Inflation”.

Inflation is an economic phenomenon characterised by a sustained increase in the general price level of goods and services in an economy over a period of time. It erodes the purchasing power of a currency, meaning that the same amount of money buys fewer goods and services. Inflation is typically expressed as an annual percentage, reflecting the rate at which prices are rising.

Several factors contribute to inflation, including increased demand for goods and services, rising production costs, changes in government policies, and external factors such as supply chain disruptions or geopolitical events. Central banks and governments often aim to manage inflation to maintain price stability and support overall economic health.

There are different types of inflation, including demand-pull inflation, cost-push inflation, and built-in inflation.

• Demand-pull inflation occurs when aggregate demand exceeds aggregate supply, leading to increased prices

• Cost-push inflation results from rising production costs, such as increased wages or higher raw material prices

• Built-in inflation, also known as wage-price inflation, occurs when workers demand higher wages, and businesses subsequently raise prices to cover increased labour costs.

While moderate inflation is a normal part of a growing economy, hyperinflation, characterized by extremely rapid and out-of-control price increases, can have severe economic consequences. Central banks use monetary policies, such as adjusting interest rates, to manage inflation and strike a balance between economic growth and price stability.