Inflation
“Inflation is measured as the annual percent change in the prices of goods deemed necessary for life in that country. The specific goods included in this "market basket" change only rarely, so this measure reflects fluctuation in purchasing power of the national currency.”
- International Monetary Fund (IMF)
Inflation refers to a general and sustained rise in the level of prices of goods and services. That is, prices of the vast majority of goods and services on sale to consumers just keep on rising and rising. Prices change over time so inflation is always given per period of time - per month or per year.
Inflation is referred to as either Demand-pull Inflation or Cost Push Inflation or Imported Inflation
Demand-pull Inflation
Inflation caused by an increase in aggregate demand is called demand-pull inflation. Aggregate demand in an economy will rise if spending by governments, consumers and/or firms increases. Consumers will be able to spend more of their incomes if they reduce saving or if a government cuts income taxes.
An increase in aggregate demand will cause prices to increase and inflation to rise if firms are unable to increase the supply of goods and services at the same rate as demand because the economy is at or above its NAIRU.
To finance an increase in aggregate demand consumers and firms may borrow more from the banking system and/or the government can issue more notes and coins. Both of these ways of financing an increase in demand involve increasing the supply of money in the economy.
Cost-push Inflation
Inflation caused by higher costs feeding into higher prices is called Cost-push inflation. The cost of producing goods and services can rise because workers demand increases in wages not matched by increa ...