Inflation

Who doesn't know inflation? At least if not the term, you all surely know how the prices of everything increase day by day, year by year! Perhaps the greatest nightmare of every breadwinner. Let's delve deep into the concept of Inflation in the light of economics today.

Inflation is a general rise in the prices of goods and services over time. Many things are responsible for it. For the sake of simplicity, we shall see the 3 key factors behind this phenomenon.

A) Demand-Pull Inflation: When demand for goods and services is higher than what the economy can produce, businesses raise prices. Think of it as a lot of people chasing too few goods. Imagine everyone suddenly wants the latest IPhone 15! Retailers can't keep up with the demand, so they raise prices because they know people are willing to pay more. And as prices go up, the purchasing power of money decreases. This means you need more money to buy the same things you used to buy for less.

B) Cost-Push Inflation: When the cost of producing goods and services goes up, like when the prices of raw materials or labor increase. Businesses pass these higher costs on to consumers. Let's say, the cost of oil (a key ingredient in many products and transportation) goes up due to global events. Businesses need to pay more for oil, and that cost gets passed on to consumers through higher prices.When such happens, consumers end up paying more for the same goods and services. It's like a ripple effect where higher input costs lead to higher prices for finished products.

C) Built-In Inflation: This is when people expect prices to rise in the future, so they demand higher wages, and businesses, in turn, raise prices. It becomes a self-fulfilling prophecy. This type of inflation is often called wage-price inflation because it's linked to the expectations of workers and businesses. If people expect prices to rise in the future, they may demand higher wages to maintain their purchasing power. Businesses, in turn, raise prices to cover increased labor costs. This cycle continues as workers ask for more pay, businesses raise prices, and consumers demand even higher wages.

However, inflation isn't inherently bad as people deem it; a moderate level (usually around 2-3% annually) is considered normal and even healthy for economies as it encourages spending and investment. But of course, extremely high inflation, also known as hyperinflation, can erode the value of money, making it less useful as a store of value. It's a complex economic phenomenon that central banks of many countries, for example the Federal Reserve in the United States, closely monitor and try to manage to keep the economy stable and avoid both hyperinflation and deflation.