essay on inflation its causes and solutions

What is inflation?

Inflation has been top of mind for many over the past few years. But how long will it persist? In June 2022, inflation in the United States jumped to 9.1 percent, reaching the highest level since February 1982. The inflation rate has since slowed in the United States , as well as in Europe , Japan , and the United Kingdom , particularly in the final months of 2023. But even though global inflation is higher than it was before the COVID-19 pandemic, when it hovered around 2 percent, it’s receding to historical levels . In fact, by late 2022, investors were predicting that long-term inflation would settle around a modest 2.5 percent. That’s a far cry from fears that long-term inflation would mimic trends of the 1970s and early 1980s—when inflation exceeded 10 percent.

Get to know and directly engage with senior McKinsey experts on inflation.

Ondrej Burkacky is a senior partner in McKinsey’s Munich office, Axel Karlsson is a senior partner in the Stockholm office, Fernando Perez is a senior partner in the Miami office, Emily Reasor is a senior partner in the Denver office, and Daniel Swan is a senior partner in the Stamford, Connecticut, office.

Inflation refers to a broad rise in the prices of goods and services across the economy over time, eroding purchasing power for both consumers and businesses. Economic theory and practice, observed for many years and across many countries, shows that long-lasting periods of inflation are caused in large part by what’s known as an easy monetary policy . In other words, when a country’s central bank sets the interest rate too low or increases money growth too rapidly, inflation goes up. As a result, your dollar (or whatever currency you use) will not go as far  today as it did yesterday. For example: in 1970, the average cup of coffee in the United States cost 25 cents; by 2019, it had climbed to $1.59. So for $5, you would have been able to buy about three cups of coffee in 2019, versus 20 cups in 1970. That’s inflation, and it isn’t limited to price spikes for any single item or service; it refers to increases in prices across a sector, such as retail or automotive—and, ultimately, a country’s economy.

How does inflation affect your daily life? You’ve probably seen high rates of inflation reflected in your bills—from groceries to utilities to even higher mortgage payments. Executives and corporate leaders have had to reckon with the effects of inflation too, figuring out how to protect margins while paying more for raw materials.

But inflation isn’t all bad. In a healthy economy, annual inflation is typically in the range of two percentage points, which is what economists consider a sign of pricing stability. When inflation is in this range, it can have positive effects: it can stimulate spending and thus spur demand and productivity when the economy is slowing down and needs a boost. But when inflation begins to surpass wage growth, it can be a warning sign of a struggling economy.

Introducing McKinsey Explainers : Direct answers to complex questions

Inflation may be declining in many markets, but there’s still uncertainty ahead: without a significant surge in productivity, Western economies may be headed for a period of sustained inflation or major economic reset , as Japan has experienced in the first decades of the 21st century.

What does seem to be changing are leaders’ attitudes. According to the 2023 year-end McKinsey Global Survey on economic conditions , respondents reported less fear about inflation as a risk to global and domestic economic growth . But this sentiment varies significantly by region: European respondents were most concerned about the effects of inflation, whereas respondents in North America offered brighter views.

What causes inflation?

Monetary policy is a critical driver of inflation over the long term. The current high rate of inflation is a result of increased money supply , high raw materials costs , labor mismatches , and supply disruptions —exacerbated by geopolitical conflict .

In general, there are two primary types, or causes, of short-term inflation:

• Demand-pull inflation occurs when the demand for goods and services in the economy exceeds the economy’s ability to produce them. For example, when demand for new cars recovered more quickly than anticipated from its sharp dip at the beginning of the COVID-19 pandemic, an intervening shortage  in the supply of semiconductors  made it hard for the automotive industry to keep up with this renewed demand. The subsequent shortage of new vehicles resulted in a spike in prices for new and used cars.
• Cost-push inflation occurs when the rising price of input goods and services increases the price of final goods and services. For example, commodity prices spiked sharply  during the pandemic as a result of radical shifts in demand, buying patterns, cost to serve, and perceived value across sectors and value chains. To offset inflation and minimize impact on financial performance, industrial companies were forced to increase prices for end consumers.

Learn more about McKinsey’s Growth, Marketing & Sales  Practice.

What are some periods in history with high inflation?

Economists frequently compare the current inflationary period with the post–World War II era , when price controls, supply problems, and extraordinary demand in the United States fueled double-digit inflation gains—peaking at 20 percent in 1947—before subsiding at the end of the decade. Consumption patterns today have been similarly distorted, and supply chains have been disrupted  by the pandemic.

The period from the mid-1960s through the early 1980s in the United States, sometimes called the “Great Inflation,” saw some of the country’s highest rates of inflation, with a peak of 14.8 percent in 1980. To combat this inflation, the Federal Reserve raised interest rates to nearly 20 percent. Some economists attribute this episode partially to monetary policy mistakes rather than to other causes, such as high oil prices. The Great Inflation signaled the need for public trust  in the Federal Reserve’s ability to lessen inflationary pressures.

Inflation isn’t solely a modern-day phenomenon, of course. One very early example of inflation comes from Roman times, from around 200 to 300 CE. Roman leaders were struggling to fund an army big enough to deal with attackers from multiple fronts. To help, they watered down  the silver in their coinage, causing the value of money to slowly fall—and inflation to pick up. This led merchants to raise their prices, causing widespread panic. In response, the emperor Diocletian issued what’s now known as the Edict on Maximum Prices, a series of price and wage controls designed to stop the rise of prices and wages (one helpful control was a maximum price for a male lion). But because the edict didn’t address the root cause of inflation—the impure silver coin—it didn’t fix the problem.

How is inflation measured?

Statistical agencies measure inflation first by determining the current value of a “basket” of various goods and services consumed by households, referred to as a price index. To calculate the rate of inflation over time, statisticians compare the value of the index over one period with that of another. Comparing one month with another gives a monthly rate of inflation, and comparing from year to year gives an annual rate of inflation.

In the United States, the Bureau of Labor Statistics publishes its Consumer Price Index (CPI), which measures the cost of items that urban consumers buy out of pocket. The CPI is broken down by region and is reported for the country as a whole. The Personal Consumption Expenditures (PCE) price index —published by the US Bureau of Economic Analysis—takes into account a broader range of consumer spending, including on healthcare. It is also weighted by data acquired through business surveys.

How does inflation affect consumers and companies differently?

Inflation affects consumers most directly, but businesses can also feel the impact:

• Consumers lose purchasing power when the prices of items they buy, such as food, utilities, and gasoline, increase. This can lead to household belt-tightening and growing pessimism about the economy .
• Companies lose purchasing power and risk seeing their margins decline , when prices increase for inputs used in production. These can include raw materials like coal and crude oil , intermediate products such as flour and steel, and finished machinery. In response, companies typically raise the prices of their products or services to offset inflation, meaning consumers absorb these price increases. The challenge for many companies is to strike the right balance between raising prices to cover input cost increases while simultaneously ensuring that they don’t raise prices so much that they suppress demand.

How can organizations respond to high inflation?

During periods of high inflation, companies typically pay more for materials , which decreases their margins. One way for companies to offset losses and maintain margins is by raising prices for consumers. However, if price increases are not executed thoughtfully, companies can damage customer relationships and depress sales —ultimately eroding the profits they were trying to protect.

When done successfully, recovering the cost of inflation for a given product can strengthen relationships and overall margins. There are five steps companies can take to ADAPT  (adjust, develop, accelerate, plan, and track) to inflation:

• Adjust discounting and promotions and maximize nonprice levers. This can include lengthening production schedules or adding surcharges and delivery fees for rush or low-volume orders.
• Develop the art and science of price change. Instead of making across-the-board price changes, tailor pricing actions to account for inflation exposure, customer willingness to pay, and product attributes.
• Accelerate decision making tenfold. Establish an “inflation council” that includes dedicated cross-functional, inflation-focused decision makers who can act quickly and nimbly on customer feedback.
• Plan options beyond pricing to reduce costs. Use “value engineering” to reimagine a portfolio and provide cost-reducing alternatives to price increases.
• Track execution relentlessly. Create a central supporting team to address revenue leakage and to manage performance rigorously. Traditional performance metrics can be less reliable when inflation is high .

Beyond pricing, a variety of commercial and technical levers can help companies deal with price increases in an inflationary market , but other sectors may require a more tailored response to pricing.

Learn more about our Financial Services , Industrials & Electronics , Operations , Strategy & Corporate Finance , and  Growth, Marketing & Sales Practices.

How can CEOs help protect their organizations against uncertainty during periods of high inflation?

In today’s uncertain environment, in which organizations have a much wider range of stakeholders, leaders must think about performance beyond short-term profitability. CEOs should lead with the complete business cycle and their complete slate of stakeholders in mind.

CEOs need an inflation management playbook , just as central bankers do. Here are some important areas to keep in mind while scripting it:

• Design. Leaders should motivate their organizations to raise the profile of design  to a C-suite topic. Design choices for products and services are critical for responding to price volatility, scarcity of components, and higher production and servicing costs.
• Supply chain. The most difficult task for CEOs may be convincing investors to accept supply chain resiliency as the new table stakes. Given geopolitical and economic realities, supply chain resiliency has become a crucial goal for supply chain leaders, alongside cost optimization.
• Procurement. CEOs who empower their procurement  organizations can raise the bar on value-creating contributions. Procurement leaders have told us time and again that the current market environment is the toughest they’ve experienced in decades. CEOs are beginning to recognize that purchasing leaders can be strategic partners by expanding their focus beyond cost cutting to value creation.
• Feedback. A CEO can take a lead role in playing back the feedback the organization is hearing. In today’s tight labor market, CEOs should guide their companies to take a new approach to talent, focusing on compensation, cultural factors, and psychological safety .
• Pricing. Forging new pricing relationships with customers will test CEOs in their role as the “ultimate integrator.” Repricing during inflationary times is typically unpleasant for companies and customers alike. With setting new prices, CEOs have the opportunity to forge deeper relationships with customers, by turning to promotions, personalization , and refreshed communications around value.
• Agility. CEOs can strive to achieve a focus based more on strategic action and less on firefighting. Managing the implications of inflation calls for a cross-functional, disciplined, and agile response.

A practical example: How is inflation affecting the US healthcare industry?

Consumer prices for healthcare have rarely risen faster than the rate of inflation—but that’s what’s happening today. The impact of inflation on the broader economy has caused healthcare costs to rise faster than the rate of inflation. Experts also expect continued labor shortages in healthcare—gaps of up to 450,000 registered nurses and 80,000 doctors —even as demand for services continues to rise. This drives up consumer prices and means that higher inflation could persist. McKinsey analysis as of 2022 predicted that the annual US health expenditure is likely to be $370 billion higher by 2027 because of inflation.

This climate of risk could spur healthcare leaders to address productivity, using tech levers to boost productivity while also reducing costs. In order to weather the storm, leaders will need to quickly set high aspirations, align their organizations around them, and execute with speed .

What is deflation?

If inflation is one extreme of the pricing spectrum, deflation is the other. Deflation occurs when the overall level of prices in an economy declines and the purchasing power of currency increases. It can be driven by growth in productivity and the abundance of goods and services, by a decrease in demand, or by a decline in the supply of money and credit.

Generally, moderate deflation positively affects consumers’ pocketbooks, as they can purchase more with less money. However, deflation can be a sign of a weakening economy, leading to recessions and depressions. While inflation reduces purchasing power, it also reduces the value of debt. During a period of deflation, on the other hand, debt becomes more expensive. And for consumers, investments such as stocks, corporate bonds, and real estate become riskier.

A recent period of deflation in the United States was the Great Recession, between 2007 and 2008. In December 2008, more than half of executives surveyed by McKinsey  expected deflation in their countries, and 44 percent expected to decrease the size of their workforces.

When taken to their extremes, both inflation and deflation can have significant negative effects on consumers, businesses, and investors.

For more in-depth exploration of these topics, see McKinsey’s Operations Insights  collection. Learn more about Operations consulting , and check out operations-related job opportunities  if you’re interested in working at McKinsey.

Articles referenced:

• “ Investing in productivity growth ,” March 27, 2024, Jan Mischke , Chris Bradley , Marc Canal, Olivia White , Sven Smit , and Denitsa Georgieva
• “ Economic conditions outlook during turbulent times, December 2023 ,” December 20, 2023
• “ Forward Thinking on why we ignore inflation—from ancient times to the present—at our peril with Stephen King ,” November 1, 2023
• “ Procurement 2023: Ten CPO actions to defy the toughest challenges ,” March 6, 2023, Roman Belotserkovskiy , Carolina Mazuera, Marta Mussacaleca , Marc Sommerer, and Jan Vandaele
• “ Why you can’t tread water when inflation is persistently high ,” February 2, 2023, Marc Goedhart and Rosen Kotsev
• “ Markets versus textbooks: Calculating today’s cost of equity ,” January 24, 2023, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm  
• “ Inflation-weary Americans are increasingly pessimistic about the economy ,” December 13, 2022, Gonzalo Charro, Andre Dua , Kweilin Ellingrud , Ryan Luby, and Sarah Pemberton
• “ Inflation fighter and value creator: Procurement’s best-kept secret ,” October 31, 2022, Roman Belotserkovskiy , Ezra Greenberg , Daphne Luchtenberg, and Marta Mussacaleca
• “ Prime Numbers: Rethink performance metrics when inflation is high ,” October 28, 2022, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm
• “ The gathering storm: The threat to employee healthcare benefits ,” October 20, 2022, Aditya Gupta , Akshay Kapur , Monisha Machado-Pereira , and Shubham Singhal
• “ Utility procurement: Ready to meet new market challenges ,” October 7, 2022, Roman Belotserkovskiy , Abhay Prasanna, and Anton Stetsenko
• “ The gathering storm: The transformative impact of inflation on the healthcare sector ,” September 19, 2022, Addie Fleron, Aneesh Krishna , and Shubham Singhal
• “ Pricing during inflation: Active management can preserve sustainable value ,” August 19, 2022, Niels Adler and Nicolas Magnette
• “ Navigating inflation: A new playbook for CEOs ,” April 14, 2022, Asutosh Padhi , Sven Smit , Ezra Greenberg , and Roman Belotserkovskiy
• “ How business operations can respond to price increases: A CEO guide ,” March 11, 2022, Andreas Behrendt ,  Axel Karlsson , Tarek Kasah, and  Daniel Swan
• “ Five ways to ADAPT pricing to inflation ,” February 25, 2022,  Alex Abdelnour , Eric Bykowsky, Jesse Nading,  Emily Reasor , and Ankit Sood
• “ How COVID-19 is reshaping supply chains ,” November 23, 2021,  Knut Alicke ,  Ed Barriball , and Vera Trautwein
• “ Navigating the labor mismatch in US logistics and supply chains ,” December 10, 2021,  Dilip Bhattacharjee , Felipe Bustamante, Andrew Curley, and  Fernando Perez
• “ Coping with the auto-semiconductor shortage: Strategies for success ,” May 27, 2021,  Ondrej Burkacky , Stephanie Lingemann, and Klaus Pototzky

This article was updated in April 2024; it was originally published in August 2022.

Want to know more about inflation?

Related articles.

What is supply chain?

How business operations can respond to price increases: A CEO guide

Five ways to ADAPT pricing to inflation

• SUGGESTED TOPICS
• The Magazine
• Newsletters
• Managing Yourself
• Managing Teams
• Work-life Balance
• The Big Idea
• Data & Visuals
• Reading Lists
• Case Selections
• HBR Learning
• Topic Feeds
• Account Settings
• Email Preferences

What Causes Inflation? 

• Walter Frick

Why your money is worth less than it used to be.

What causes inflation? There is no one answer, but like so much of macroeconomics it comes down to a mix of output, money, and expectations. Supply shocks can lower an economy’s potential output, driving up prices. An increase in the money supply can stoke demand, driving up prices. And the expectation of inflation can become a self-fulfilling cycle as workers and companies demand higher wages and set higher prices.

Since the financial crisis of 2008 and the Great Recession, investors and executives have grown accustomed to a world of low interest rates and low inflation. No longer. In 2021, inflation began rising sharply in many parts of the world, and in 2022 the U.S. saw its worst inflation in decades.

• Walter Frick is a contributing editor at Harvard Business Review , where he was formerly a senior editor and deputy editor of HBR.org. He is the founder of Nonrival , a newsletter where readers make crowdsourced predictions about economics and business. He has been an executive editor at Quartz as well as a Knight Visiting Fellow at Harvard’s Nieman Foundation for Journalism and an Assembly Fellow at Harvard’s Berkman Klein Center for Internet & Society. He has also written for The Atlantic , MIT Technology Review , The Boston Globe , and the BBC, among other publications.

Partner Center

What is inflation, and why has it been so high?

Subscribe to election ’24, ben harris ben harris vice president and director - economic studies , director - retirement security project @econ_harris.

April 3, 2024

Transcript:

Inflation, the change in price of goods and services over time, is often confused with the cost of things.  

Inflation is not about how much things cost, but rather how prices are changing in a given month or year.   

There’s no single culprit.   Early in the pandemic, there were fewer workers and disruptions in the availability of goods due to snarled shipping routes and shuttered childcare centers, among other factors.  

At the same time, demand for some products soared: pandemic-era stimulus programs left shoppers with extra cash to spend, and everyone wanted to buy the same types of things.

More recently, inflation has been driven mostly by the cost of buying or renting a home. This is due to entirely different reasons, mainly that new homebuilding has been slow and older Americans are not moving out of their homes as frequently.

Inflation has slowed since its peak, but that only means prices aren’t rising as quickly as before. The chance that prices actually fall are very slim, although we have seen price declines in products likes eggs and used cars.

Still, the U.S. has made great progress. Reining in inflation has not led to a recession and widespread job loss.  

Cooling inflation, while keeping unemployment at historically low levels, has been the ideal scenario, or what economists like to call a “soft landing.” 

The Fed has targeted an average inflation rate of 2% and will use the tools necessary to get the economy to that place. It’s less a question of “if” inflation will reach this level, and more a question of “when” and how much economic pain it will take.  

Right now it seems like the answer appears to be “soon” and “not too much.”   

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online  here . The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.

Federal Fiscal Policy

Economic Studies

Election ’24: Issues at Stake

The Brookings Institution, Washington D.C.

10:00 am - 3:00 pm EDT

William G. Gale

May 8, 2024

Stefanie Stantcheva

March 27, 2024

• Facebook social media link
• Twitter social media link
• YouTube social media link
• LinkedIn social media link

Mobile Menu Overlay

The causes of and responses to today’s inflation.

December 6, 2022

By Joseph E. Stiglitz, Ira Regmi

• Share this page on Facebook
• Share this page on Twitter
• Share this page via Email Mail Icon Rectangle in the shape of an envelope

The evidence is overwhelming: were there no supply problems, aggregate demand would not be excessive. The inflation we’ve experienced is best understood as resulting from industry-specific problems that many Organisation for Economic Co-operation and Development (OECD) countries are facing. A strong labor market is part of the solution, not the problem.

Over the last couple years, the world has experienced the highest levels of inflation in more than four decades. There are multiple sources of economic disruption that have likely contributed to this inflation, most notably pandemic shutdowns and reopenings and Russia’s invasion of Ukraine. The inflation, in turn, has sparked a debate about its causes, with some claiming it is demand-induced, largely the result of high spending in response to the pandemic. Others focus on pandemic-induced supply shortages and demand shifts, possibly exacerbated by market power and market manipulation. While there may be elements of all of these, the policy response needs to address the dominant cause. If it’s a result of excessive aggregate demand , then monetary policy—reducing aggregate demand through monetary tightening—is appropriate. If it’s largely supply-driven, a more tailored response is required, including fiscal policy that alleviates the supply constraints.

Our analysis concludes that today’s inflation is largely driven by supply shocks and sectoral demand shifts, not by excess aggregate demand.

Monetary policy, then, is too blunt an instrument because it will greatly reduce inflation only at the cost of unnecessarily high unemployment, with severe adverse distributive consequences. This paper presents a variety of fiscal and other policy measures that hold out the prospect of having a more significant effect on inflation. In particular, these measures would reduce inflation’s impact on the most vulnerable and provide long-term benefits to the economy without the likely high costs of excessively rapid and large increases in interest rates.

We look at both the aggregate and sectoral-level data, and show, notably, that real personal consumption has largely been below trend, particularly in the periods when inflation heated up, and total real aggregate demand has been consistently below trend, which reinforces the conclusion that the “problem” arises from the supply side.

As seen in the Figure above, real personal consumption has largely been below trend, particularly in the periods when inflation heated up. In addition, with three fiscal quarters of anemic growth, from the fourth quarter of 2021 to the second quarter of 2022, it is hard to see how excess demand by itself could be at the root of the problem.

Is today’s inflation the result of excessive aggregate demand, or is it the result of overlapping sectoral supply side shifts and shocks? We just released a new paper by @JosephEStiglitz and @Regmi_Ira making a wide-ranging case for the latter. 🧵(1/8) https://t.co/TTVBUoOXwo — Roosevelt Institute (@rooseveltinst) December 6, 2022

With three fiscal quarters of anemic growth, from the fourth quarter of 2021 to the second quarter of 2022, it is hard to see how excess demand by itself could be at the root of the problem. Moreover, inflation in the United States is no worse than in other countries even as Americans saw a more robust recovery, largely because we had more fiscal support. A sectoral breakdown of inflation, as well as a closer look at the patterns in the timing of inflation, further support the conclusion that excessive spending during the pandemic is not the principal cause of today’s inflation.

Breaking down inflation by sector reveals that it is tied to the obvious shocks and supply chain interruptions the economy has experienced, from high food and energy prices to the shortage of microchips for automobiles.

We also explain how the large pandemic-induced shifts in demand, such as those associated with housing, have contributed to today’s inflation.

Another important factor is the increase in market concentration, which has generated greater market power; the current circumstances have provided a prime opportunity for a greater exercise of that market power.

A Wage-Price Spiral?

The paper also addresses the concern that inflation will seep through the economy, regardless of its original source, as a wage-price spiral is set in motion. We conclude that with nominal wages already tempered, this does not seem likely. Moreover, declining real wages are typically not a sign of a tight labor market. Weak unions, globalization, and changes in the structure of the economy provide part of the explanation for why wage-price dynamics today may be markedly different from 50 years ago.

Conventional economics worries that inflationary expectations might perpetuate inflation; but so far, inflationary expectations appear mild, perhaps because many market participants agree with our analysis that the underlying sources of today’s inflation are supply side interruptions, less temporary than people had hoped for at the onset of the inflation, but temporary nonetheless. Recent data are consistent with this perspective: While inflation does vary considerably month to month, it is heartening that it has slowed over the last four months to 2.8 percent (BLS CPI; authors’ calculations)—a slowing consistent with the supply side interpretation, but inconsistent with the standard macroeconomic demand-side analysis. (Because there was higher month-over-month inflation at the end of 2021 and the beginning of 2022, the year-over-year rate remains high at 7.7 percent.) The New York Federal Reserve’s “Underlying Inflation Gauge” peaked in July 2022 at 4.9 percent, and by October 2022 was at 4.2 percent.

The Right Policy Response

This analysis provides a different perspective from conventional economics on the appropriate policy responses to current inflation. Conventional wisdom, partly based on a wealth of experience in which demand shocks have given rise to inflation, holds that interest rates should be increased when there is inflation, whatever the cause . Interest rates worldwide have been abnormally low, partly because of the excessive reliance on monetary policy in response to the 2008 financial crisis. But the cost of capital should not be zero (or worse, negative).

Restoring interest rates to more normal levels has distinct advantages. Going beyond that—raising them too far and too quickly—is problematic, especially given the buildup of debt in the era of near-zero interest rates.

Most importantly, such increases in interest rates will not substantially lower inflation unless they induce a major contraction in the economy, which is a cure worse than the disease. An economic downturn like that is likely to have long-lasting adverse effects, and the most marginalized in society will bear the brunt. Volatile energy and food prices are largely internationally driven and not under the control of the Federal Reserve. The recent aggressive hikes have not remedied these price increases and are unlikely to do so in the future. Inflation induced by these price fluctuations may come down (as it has recently in some months in the United States), but not because of Fed action. To the contrary, the paper explains several reasons why large and rapid increases in interest rates, beyond normalizing them, may be counterproductive. For instance, they could impede investments that might alleviate some of the supply shortages.

By contrast, well-designed fiscal and other policies can help to ameliorate the supply shortages, tame inflation, and protect the vulnerable, providing long-term benefits even if it should turn out that inflationary pressures are transient.

Key Takeaways

Today’s inflation comes mostly from sectoral supply side disruptions, largely the result of the COVID-19 pandemic and its consequent disturbances to supply chains; and disruptions to energy and food markets originating from Russia’s invasion of Ukraine. Demand patterns too have undergone significant changes, again largely induced by the pandemic. In some sectors, these effects have been amplified as a result of the exercise of market power. But today’s inflation, for the most part, is not the result of significant excesses of aggregate demand such as might have arisen from excessive US pandemic spending.

While we welcome the return of interest rates to more normal levels, which reduces a number of distortions associated with persistent, abnormally low interest rates, increasing interest rates too far and too quickly risks a painful slowdown to the economy with minimal benefits to inflation short of a significant downturn. This would have particular adverse distributional consequences, especially for marginalized groups in the country.

There are fiscal and other measures that can and should be taken to alleviate particular sectoral inflationary pressures, and that are likely to be more effective than broad-based interest rate increases.

Recent data shows significant moderation of inflationary pressures, with nominal wage increases in particular being only a little over pre-pandemic levels. This, together with other indicators such as tempered inflationary expectations, goes a long way in alleviating worries about an incipient wage-price spiral.

Explore more of our work on inflation

Inflation in 2023: causes, progress, and solutions.

March 9, 2023

By Mike Konczal

A New Framework for Targeting Inflation: Aiming for a Range of 2 to 3.5 Percent

November 17, 2022

By Justin Bloesch

Why Market Power Matters for Inflation

September 22, 2022

As Inflation Slows, Don’t Credit the Fed

February 17, 2023

By Ira Regmi

How Not to Fight Inflation

January 30, 2023

By Joseph Stiglitz

Is it Time for the Fed to Pause

The Roosevelt Institute hosted a webinar to discuss this report, The Causes of and Responses to Today’s Inflation, by Joseph Stiglitz and Ira Regmi, who find that today’s inflation is largely driven by supply shocks and sectoral demand shifts.

Tags: Democratic Governance , Monetary Policy

Joseph Stiglitz

As chief economist and senior fellow at the Roosevelt Institute, Joseph Stiglitz focuses on income distribution, risk, corporate governance, public policy, macroeconomics, and globalization.

Ira Regmi is the program manager for the Macroeconomic Analysis program at Roosevelt where they support the team’s work on fiscal and monetary policy, unemployment, and growth to ensure an economy that works for all.

Inflation: What It Is, How It Can Be Controlled, and Extreme Examples

What you need to know about the purchasing power of money and how it changes

• Search Search Please fill out this field.

What Is Inflation?

How inflation impacts consumers, what causes inflation.

• How to Protect Your Finances

Types of Price Indexes

• Formula for Measuring Inflation
• Pros and Cons of Inflation

How Inflation Can Be Controlled

• Deflation and Disinflation

Hedging Against Inflation

Examples of inflation, the bottom line.

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

• Inflation: What It Is, How It Can Be Controlled, and Extreme Examples CURRENT ARTICLE
• 9 Common Effects of Inflation
• How to Profit From Inflation
• When Is Inflation Good for the Economy?
• How Does Current Cost of Living Compare to 20 Years Ago?
• Why Are P/E Ratios Higher When Inflation Is Low?
• What Causes Inflation and Who Profits From It?
• Understand the Different Types of Inflation
• Wage Push Inflation
• Cost-Push Inflation
• Cost-Push Inflation vs. Demand-Pull Inflation: What's the Difference?
• Inflation vs. Stagflation: What's the difference?
• What is the Relationship Between Inflation and Interest Rates?
• Inflation's Impact on Stock Returns
• How Does Inflation Affect Fixed-Income Investments?
• How Inflation Affects Your Cost of Living
• How Inflation Impacts Your Savings
• How Inflation Eats Away at Your Retirement Income
• What Impact Does Inflation Have on the Dollar Value Today?
• Inflation and Economic Recovery
• Hyperinflation
• Why Didn't Quantitative Easing Lead to Hyperinflation?
• Worst Cases of Hyperinflation in History
• How the Great Inflation of the 1970s Happened
• Stagflation
• Purchasing Power
• Consumer Price Index (CPI)
• Why Is the Consumer Price Index Controversial?
• Core Inflation
• Headline Inflation
• GDP Price Deflator
• Inflation Accounting
• Inflation-Adjusted Return
• Inflation Targeting
• Real Economic Growth Rate
• Real Gross Domestic Product (GDP)
• Real Income
• Real Interest Rate
• Real Rate of Return
• Wage-Price Spiral

Inflation is a gradual loss of purchasing power, reflected in a broad rise in prices for goods and services over time.

The inflation rate is calculated as the average price increase of a basket of selected goods and services over one year. High inflation means that prices are increasing quickly, with low inflation meaning that prices are increasing more slowly. Inflation can be contrasted with deflation, which occurs when prices decline and purchasing power increases.

Key Takeaways

• Inflation measures how quickly the prices of goods and services are rising.
• Inflation is sometimes classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation.
• The most commonly used inflation indexes are the Consumer Price Index and the Wholesale Price Index.
• Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change.
• Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets.

While it is easy to measure the price changes of individual products over time, human needs extend beyond just one or two products. Individuals need a big and diversified set of products as well as a host of services for living a comfortable life. They include commodities like food grains, metal, fuel, utilities like electricity and transportation, and services like healthcare , entertainment, and labor.

Inflation aims to measure the overall impact of price changes for a diversified set of products and services. It allows for a single value representation of the increase in the price level of goods and services in an economy over a specified time.

Prices rise, which means that one unit of money buys fewer goods and services. This loss of purchasing power impacts the cost of living for the common public which ultimately leads to a deceleration in economic growth. The consensus view among economists is that sustained inflation occurs when a nation's money supply growth outpaces economic growth.

The increase in the Consumer Price Index For All Urban Consumers (CPI-U) over the 12 months ending April 2024 on an unadjusted basis. Prices rose 0.3% on a seasonally adjusted basis in April 2024 from the previous month.

To combat this, the monetary authority (in most cases, the central bank ) takes the necessary steps to manage the money supply and credit to keep inflation within permissible limits and keep the economy running smoothly.

Theoretically, monetarism is a popular theory that explains the relationship between inflation and the money supply of an economy. For example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and silver flowed into the Spanish and other European economies. Since the money supply rapidly increased, the value of money fell, contributing to rapidly rising prices.

Inflation is measured in a variety of ways depending on the types of goods and services. It is the opposite of deflation , which indicates a general decline in prices when the inflation rate falls below 0%. Keep in mind that deflation shouldn't be confused with disinflation , which is a related term referring to a slowing down in the (positive) rate of inflation.

Investopedia / Julie Bang

An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy. A country's money supply can be increased by the monetary authorities by:

• Printing and giving away more money to citizens
• Legally devaluing (reducing the value of) the legal tender currency
• Loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market (the most common method)
• Supply bottlenecks and shortages of key goods, causing other prices to rise.

In all of these cases, the money ends up losing its purchasing power. The mechanisms of how this drives inflation can be classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation.

Demand-Pull Effect

Demand-pull inflation occurs when an increase in the supply of money and credit stimulates the overall demand for goods and services to increase more rapidly than the economy's production capacity. This increases demand and leads to price rises.

When people have more money, it leads to positive consumer sentiment. This, in turn, leads to higher spending, which pulls prices higher. It creates a demand-supply gap with higher demand and less flexible supply, which results in higher prices.

Melissa Ling {Copyright} Investopedia, 2019

Cost-Push Effect

Cost-push inflation is a result of the increase in prices working through the production process inputs. When additions to the supply of money and credit are channeled into a commodity or other asset markets, costs for all kinds of intermediate goods rise. This is especially evident when there's a negative economic shock to the supply of key commodities.

These developments lead to higher costs for the finished product or service and work their way into rising consumer prices. For instance, when the money supply is expanded, it creates a speculative boom in oil prices . This means that the cost of energy can rise and contribute to rising consumer prices, which is reflected in various measures of inflation.

Built-in Inflation

Built-in inflation is related to adaptive expectations or the idea that people expect current inflation rates to continue in the future. As the price of goods and services rises, people may expect a continuous rise in the future at a similar rate.

As such, workers may demand more costs or wages to maintain their standard of living. Their increased wages result in a higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa.

How to Protect Your Finances During Inflation

There are a range of measures that individuals can take to protect their finances against inflation.

For instance, one may choose to invest in asset classes that outperform the market during inflationary times. This might include commodities like grain, beef, oil, electricity, and natural gas. Commodity prices typically stay one step ahead of product prices, and price increases for commodities are often seen as an indicator of inflation to come. However, commodities can also be volatile, easily affected by natural disasters, geopolitics, or conflict.

Real estate income may also help buffer against inflation, as landlords can increase their rent to keep pace with the rise of prices overall.

The U.S. government also offers Treasury Inflation-Protected Securities (TIPS), a type of security indexed to inflation to protect against declines in purchasing power.

Depending upon the selected set of goods and services used, multiple types of baskets of goods are calculated and tracked as price indexes. The most commonly used price indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) .

The Consumer Price Index (CPI)

The CPI is a measure that examines the weighted average of prices of a basket of goods and services that are of primary consumer needs. They include transportation, food, and medical care.

CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket. The prices in consideration are the retail prices of each item, as available for purchase by the individual citizens. CPI can impact the value of one currency in relation to those of other nations.

Changes in the CPI are used to assess price changes associated with the cost of living , making it one of the most frequently used statistics for identifying periods of inflation or deflation. In the U.S., the Bureau of Labor Statistics (BLS) reports the CPI on a monthly basis and has calculated it as far back as 1913.

The CPI-U, which was introduced in 1978, represents the buying habits of approximately 88% of the non-institutional population of the United States.

The Wholesale Price Index (WPI)

The WPI is another popular measure of inflation. It measures and tracks the changes in the price of goods in the stages before the retail level.

While WPI items vary from one country to another, they mostly include items at the producer or wholesale level. For example, it includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and cotton clothing.

Although many countries and organizations use WPI, many other countries, including the U.S., use a similar variant called the producer price index (PPI) .

The Producer Price Index (PPI)

The PPI is a family of indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time. The PPI measures price changes from the perspective of the seller and differs from the CPI which measures price changes from the perspective of the buyer.

In all variants, the rise in the price of one component (say oil) may cancel out the price decline in another (say wheat) to a certain extent. Overall, each index represents the average weighted price change for the given constituents which may apply at the overall economy, sector , or commodity level.

The Formula for Measuring Inflation

The above-mentioned variants of price indexes can be used to calculate the value of inflation between two particular months (or years). While a lot of ready-made inflation calculators are already available on various financial portals and websites, it is always better to be aware of the underlying methodology to ensure accuracy with a clear understanding of the calculations. Mathematically,

Percent Inflation Rate = (Final CPI Index Value ÷ Initial CPI Value) x 100

Say you wish to know how the purchasing power of $10,000 changed between January 1975 and January 2024. One can find price index data on various portals in a tabular form. From that table, pick up the corresponding CPI figures for the given two months. For September 1975, it was 52.1 (initial CPI value) and for January 2024, it was 308.417 (final CPI value).

Plugging in the formula yields:

Percent Inflation Rate = (308.417 ÷ 52.1) x 100 = (5.9197) x 100 = 591.97%

Since you wish to know how much $10,000 from January 1975 would be worth in January 2024, multiply the inflation rate by the amount to get the changed dollar value:

Change in Dollar Value = 5.9197 x $10,000 = $59,197

This means that $10,000 in January 1975 will be worth $59,197 today. Essentially, if you purchased a basket of goods and services (as included in the CPI definition) worth $10,000 in 1975, the same basket would cost you $59,197 in January 2024.

Advantages and Disadvantages of Inflation

Inflation can be construed as either a good or a bad thing, depending upon which side one takes, and how rapidly the change occurs.

Individuals with tangible assets (like property or stocked commodities) priced in their home currency may like to see some inflation as that raises the price of their assets, which they can sell at a higher rate.

Inflation often leads to speculation by businesses in risky projects and by individuals who invest in company stocks because they expect better returns than inflation.

An optimum level of inflation is often promoted to encourage spending to a certain extent instead of saving. If the purchasing power of money falls over time, there may be a greater incentive to spend now instead of saving and spending later. It may increase spending, which may boost economic activities in a country. A balanced approach is thought to keep the inflation value in an optimum and desirable range.

Disadvantages

Buyers of such assets may not be happy with inflation, as they will be required to shell out more money. People who hold assets valued in their home currency, such as cash or bonds, may not like inflation, as it erodes the real value of their holdings.

As such, investors looking to protect their portfolios from inflation should consider inflation-hedged asset classes, such as gold, commodities, and real estate investment trusts (REITs). Inflation-indexed bonds are another popular option for investors to profit from inflation .

High and variable rates of inflation can impose major costs on an economy. Businesses, workers, and consumers must all account for the effects of generally rising prices in their buying, selling, and planning decisions.

This introduces an additional source of uncertainty into the economy, because they may guess wrong about the rate of future inflation. Time and resources expended on researching, estimating, and adjusting economic behavior are expected to rise to the general level of prices. That's opposed to real economic fundamentals, which inevitably represent a cost to the economy as a whole.

Even a low, stable, and easily predictable rate of inflation, which some consider otherwise optimal, may lead to serious problems in the economy. That's because of how, where, and when the new money enters the economy.

Whenever new money and credit enter the economy, it is always in the hands of specific individuals or business firms. The process of price level adjustments to the new money supply proceeds as they then spend the new money and it circulates from hand to hand and account to account through the economy.

Inflation does drive up some prices first and drives up other prices later. This sequential change in purchasing power and prices (known as the Cantillon effect) means that the process of inflation not only increases the general price level over time. But it also distorts relative prices , wages, and rates of return along the way.

Economists, in general, understand that distortions of relative prices away from their economic equilibrium are not good for the economy, and Austrian economists even believe this process to be a major driver of cycles of recession in the economy.

Leads to higher resale value of assets

Optimum levels of inflation encourage spending

Buyers have to pay more for products and services

Impose higher prices on the economy

Drives some prices up first and others later

A country’s financial regulator shoulders the important responsibility of keeping inflation in check. It is done by implementing measures through monetary policy , which refers to the actions of a central bank or other committees that determine the size and rate of growth of the money supply.

In the U.S., the Fed's monetary policy goals include moderate long-term interest rates, price stability, and maximum employment. Each of these goals is intended to promote a stable financial environment. The Federal Reserve clearly communicates long-term inflation goals in order to keep a steady long-term rate of inflation , which is thought to be beneficial to the economy.

Price stability or a relatively constant level of inflation allows businesses to plan for the future since they know what to expect. The Fed believes that this will promote maximum employment, which is determined by non-monetary factors that fluctuate over time and are therefore subject to change.

For this reason, the Fed doesn't set a specific goal for maximum employment, and it is largely determined by employers' assessments. Maximum employment does not mean zero unemployment, as at any given time there is a certain level of volatility as people vacate and start new jobs.

Hyperinflation is often described as a period of inflation of 50% or more per month.

Monetary authorities also take exceptional measures in extreme conditions of the economy. For instance, following the 2008 financial crisis, the U.S. Fed kept the interest rates near zero and pursued a bond-buying program called quantitative easing (QE) .

Some critics of the program alleged it would cause a spike in inflation in the U.S. dollar, but inflation peaked in 2007 and declined steadily over the next eight years. There are many complex reasons why QE didn't lead to inflation or hyperinflation , though the simplest explanation is that the recession itself was a very prominent deflationary environment, and quantitative easing supported its effects.

Consequently, U.S. policymakers have attempted to keep inflation steady at around 2% per year. The European Central Bank (ECB) has also pursued aggressive quantitative easing to counter deflation in the eurozone, and some places have experienced negative interest rates . That's due to fears that deflation could take hold in the eurozone and lead to economic stagnation.

Moreover, countries that experience higher rates of growth can absorb higher rates of inflation. India's target is around 4% (with an upper tolerance of 6% and a lower tolerance of 2%), while Brazil aims for 3.25% (with an upper tolerance of 4.75% and a lower tolerance of 1.75%).

Meaning of Inflation, Deflation, and Disinflation

While a high inflation rate means that prices are increasing, a low inflation rate does not mean that prices are falling. Counterintuitively, when the inflation rate falls, prices are still increasing, but at a slower rate than before. When the inflation rate falls (but remains positive) this is known as disinflation .

Conversely, if the inflation rate becomes negative, that means that prices are falling. This is known as deflation , which can have negative effects on an economy. Because buying power increases over time, consumers have less incentive to spend money in the short term, resulting in falling economic activity.

Stocks are considered to be the best hedge against inflation , as the rise in stock prices is inclusive of the effects of inflation. Since additions to the money supply in virtually all modern economies occur as bank credit injections through the financial system, much of the immediate effect on prices happens in financial assets that are priced in their home currency, such as stocks.

Special financial instruments exist that one can use to safeguard investments against inflation . They include Treasury Inflation-Protected Securities (TIPS) , low-risk treasury security that is indexed to inflation where the principal amount invested is increased by the percentage of inflation.

One can also opt for a TIPS mutual fund or TIPS-based exchange-traded fund (ETF). To get access to stocks, ETFs, and other funds that can help avoid the dangers of inflation, you'll likely need a brokerage account. Choosing a stockbroker can be a tedious process due to the variety among them.

Gold is also considered to be a hedge against inflation, although this doesn't always appear to be the case looking backward.

Since all world currencies are fiat money , the money supply could increase rapidly for political reasons, resulting in rapid price level increases. The most famous example is the hyperinflation that struck the German Weimar Republic in the early 1920s.

The nations that were victorious in World War I demanded reparations from Germany, which could not be paid in German paper currency, as this was of suspect value due to government borrowing. Germany attempted to print paper notes, buy foreign currency with them, and use that to pay their debts.

This policy led to the rapid devaluation of the German mark along with the hyperinflation that accompanied the development. German consumers responded to the cycle by trying to spend their money as fast as possible, understanding that it would be worth less and less the longer they waited. More money flooded the economy, and its value plummeted to the point where people would paper their walls with practically worthless bills. Similar situations occurred in Peru in 1990 and in Zimbabwe between 2007 and 2008.

What Causes Inflation?

There are three main causes of inflation: demand-pull inflation, cost-push inflation, and built-in inflation.

• Demand-pull inflation refers to situations where there are not enough products or services being produced to keep up with demand, causing their prices to increase.
• Cost-push inflation, on the other hand, occurs when the cost of producing products and services rises, forcing businesses to raise their prices.
• Built-in inflation (which is sometimes referred to as a wage-price spiral) occurs when workers demand higher wages to keep up with rising living costs. This in turn causes businesses to raise their prices in order to offset their rising wage costs, leading to a self-reinforcing loop of wage and price increases.

Is Inflation Good or Bad?

Too much inflation is generally considered bad for an economy, while too little inflation is also considered harmful. Many economists advocate for a middle ground of low to moderate inflation, of around 2% per year.

Generally speaking, higher inflation harms savers because it erodes the purchasing power of the money they have saved; however, it can benefit borrowers because the inflation-adjusted value of their outstanding debts shrinks over time.

What Are the Effects of Inflation?

Inflation can affect the economy in several ways. For example, if inflation causes a nation’s currency to decline, this can benefit exporters by making their goods more affordable when priced in the currency of foreign nations.

On the other hand, this could harm importers by making foreign-made goods more expensive. Higher inflation can also encourage spending, as consumers will aim to purchase goods quickly before their prices rise further. Savers, on the other hand, could see the real value of their savings erode, limiting their ability to spend or invest in the future.

Why Is Inflation So High Right Now?

In 2022, inflation rates around the world rose to their highest levels since the early 1980s. While there is no single reason for this rapid rise in global prices, a series of events worked together to boost inflation to such high levels.

The COVID-19 pandemic led to lockdowns and other restrictions that greatly disrupted global supply chains, from factory closures to bottlenecks at maritime ports. Governments also issued stimulus checks and increased unemployment benefits to counter the financial impact on individuals and small businesses. When vaccines became widespread and the economy bounced back, demand (fueled in part by stimulus money and low interest rates) quickly outpaced supply, which still struggled to get back to pre-COVID levels.

Russia's unprovoked invasion of Ukraine in early 2022 led to economic sanctions and trade restrictions on Russia, limiting the world's supply of oil and gas since Russia is a large producer of fossil fuels. Food prices also rose as Ukraine's large grain harvests could not be exported. As fuel and food prices rose, it led to similar increases down the value chains. The Fed raised interest rates to combat the high inflation, which significantly came down in 2023, though it remains above pre-pandemic levels .

Inflation is a rise in prices, which results in the decline of purchasing power over time. Inflation is natural and the U.S. government targets an annual inflation rate of 2%; however, inflation can be dangerous when it increases too much, too fast.

Inflation makes items more expensive, especially if wages do not rise by the same levels of inflation. Additionally, inflation erodes the value of some assets, especially cash. Governments and central banks seek to control inflation through monetary policy.

U.S. Bureau of Labor Statistics. " CONSUMER PRICE INDEX ," Page 1.

Edo, Anthony and Melitz, Jacques. " The Primary Cause of European Inflation in 1500-1700: Precious Metals or Population? The English Evidence ." CEPII Working Paper , October 2019, pp. 13-14. Download PDF.

U.S. Bureau of Labor Statistics. " Consumer Price Index: Overview ."

U.S. Bureau of Labor Statistics. " Chapter 17. The Consumer Price Index (Updated 2-14-2018) ," Page 2.

U.S. Bureau of Labor Statistics. " Consumer Price Index Chronology ."

U.S. Bureau of Labor Statistics. " Producer Price Index Frequently Asked Questions (FAQs) ," Select "4. How does the Producer Price Index differ from the Consumer Price Index?"

U.S. Bureau of Labor Statistics. " Producer Price Index Frequently Asked Questions (FAQs) ," Select "3. When did the Wholesale Price Index become the Producer Price Index?"

U.S. Bureau of Labor Statistics. " Producer Price Indexes ."

U.S. Bureau of Labor Statistics. " Consumer Price Index Historical Tables for U.S. City Average ."

U.S. Bureau of Labor Statistics. " Historical CPI-U ," Page 3.

Adam Smith Institute. " The Cantillion Effect ."

Foundation for Economic Education. " The Current Economic Crisis and the Austrian Theory of the Business Cycle ."

Board of Governors of the Federal Reserve System. " Review of Monetary Policy Strategy, Tools, and Communication ."

Board of Governors of the Federal Reserve System. " What is the Lowest Level of Unemployment that the U.S. Economy Can Sustain? "

Fischer, Stanley and et al. " Modern Hyper- and High Inflations ." Journal of Economic Literature , vol. 40, no. 3, September 2002, pp. 837.

Federal Reserve History. " The Great Recession and its Aftermath ."

Federal Reserve Bank of New York. " Liberty Street Economics: Ten Years Later—Did QE Work? "

Congressional Budget Office. " How the Federal Reserve’s Quantitative Easing Affects the Federal Budget ."

Board of Governors of the Federal Reserve System. " FAQs: Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run? "

European Central Bank. " How Quantitative Easing Works ."

Reserve Bank of India. " Monetary Policy ," Select "The Monetary Policy Framework."

Central Bank of Brazil. " Inflation Targeting Track Record ."

TreasuryDirect. " Treasury Inflation-Protected Securities (TIPS) ."

University of Illinois, Urbana-Champaign. " 1920s Hyperinflation in Germany and Bank Notes ."

Rossini, Renzo (Editors Alejandro M. Werner and Alejandro Santos). " Staying the Course of Economic Success: Chapter 2. Peru’s Recent Economic History: From Stagnation, Disarray, and Mismanagement to Growth, Stability, and Quality Policies ." International Monetary Fund, September 2015.

Kramarenko, Vitaliy and et al. " Zimbabwe: Challenges and Policy Options after Hyperinflation ." International Monetary Fund , June 2010, no. 6.

The World Bank. " Inflation, Consumer Prices (Annual %) ."

Federal Reserve Bank of St. Louis, FRED. " Consumer Price Index for All Urban Consumers: All Items in U.S. City Average ."

Board of Governors of the Federal Reserve System. " Open Market Operations ."

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

Home — Essay Samples — Economics — Political Economy — Inflation

Essays on Inflation

Inflation essay topics and outline examples, essay title 1: understanding inflation: causes, effects, and economic policy responses.

Thesis Statement: This essay provides a comprehensive analysis of inflation, exploring its root causes, the economic and societal effects it generates, and the various policy measures employed by governments and central banks to manage and mitigate inflationary pressures.

• Introduction
• Defining Inflation: Concept and Measurement
• Causes of Inflation: Demand-Pull, Cost-Push, and Monetary Factors
• Effects of Inflation on Individuals, Businesses, and the Economy
• Inflationary Policies: Central Bank Actions and Government Interventions
• Case Studies: Historical Inflationary Periods and Their Consequences
• Challenges in Inflation Management: Balancing Growth and Price Stability

Essay Title 2: Inflation and Its Impact on Consumer Purchasing Power: A Closer Look at the Cost of Living

Thesis Statement: This essay focuses on the effects of inflation on consumer purchasing power, analyzing how rising prices affect the cost of living, household budgets, and the strategies individuals employ to cope with inflation-induced challenges.

• Inflation's Impact on Prices: Understanding the Cost of Living Index
• Consumer Behavior and Inflation: Adjustments in Spending Patterns
• Income Inequality and Inflation: Examining Disparities in Financial Resilience
• Financial Planning Strategies: Savings, Investments, and Inflation Hedges
• Government Interventions: Indexation, Wage Controls, and Social Programs
• The Global Perspective: Inflation in Different Economies and Regions

Essay Title 3: Hyperinflation and Economic Crises: Case Studies and Lessons from History

Thesis Statement: This essay explores hyperinflation as an extreme form of inflation, examines historical case studies of hyperinflationary crises, and draws lessons on the devastating economic and social consequences that result from unchecked inflationary pressures.

• Defining Hyperinflation: Thresholds and Characteristics
• Case Study 1: Weimar Republic (Germany) and the Hyperinflation of 1923
• Case Study 2: Zimbabwe's Hyperinflationary Collapse in the Late 2000s
• Impact on Society: Currency Devaluation, Poverty, and Social Unrest
• Responses and Recovery: Stabilizing Currencies and Rebuilding Economies
• Preventative Measures: Policies to Avoid Hyperinflationary Crises

The Impact of Inflation Reduction Act on The International Economic Stage

The oscillating tides of the american economy, made-to-order essay as fast as you need it.

Each essay is customized to cater to your unique preferences

+ experts online

Analyzing The Inflation Reduction Act

Report on inflation and its causes, the rise of inflation rate in the us, iflation and its causes, let us write you an essay from scratch.

• 450+ experts on 30 subjects ready to help
• Custom essay delivered in as few as 3 hours

Methods to Control Inflation

The grade inflation, inflation: a deceitful solution to debt, how to control inflation in pakistan, get a personalized essay in under 3 hours.

Expert-written essays crafted with your exact needs in mind

Main Factors of Inflation in Singapore

Effects of inflation on commercial banks’ lending: a case of kenya commercial bank limited, food inflation in the republic of india, the issue of unemployment and inflation in colombia, the theory and policy of macroeconomics on inflation rate, socio-economic conditions in 'what is poverty' by jo goodwin parker, non-accelerating inflation rate of unemployment (nairu), targeting zero inflation and increase of government spending as a way of curbing recession, howa spiraling inflation has impacted the venezuelan economy, how venezuela has been affected by inflation, effects of inflation on kenya commercial banks lending, exploring theories of inflation in economics, about fuel prices: factors, impacts, and solutions, exploring the implications of the inflation reduction act, inflation reduction act in the frame of macroeconomic challenges, relevant topics.

• Unemployment
• Penny Debate
• Supply and Demand
• American Dream
• Minimum Wage
• Real Estate

By clicking “Check Writers’ Offers”, you agree to our terms of service and privacy policy . We’ll occasionally send you promo and account related email

No need to pay just yet!

We use cookies to personalyze your web-site experience. By continuing we’ll assume you board with our cookie policy .

• Instructions Followed To The Letter
• Deadlines Met At Every Stage
• Unique And Plagiarism Free

Causes of Inflation

Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (AD) (economic growth too fast) or cost-push factors (supply-side factors).

Summary of the main causes of inflation

• Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth too rapid)
• Cost-push inflation – For example, higher oil prices feeding through into higher costs.
• Devaluation – increasing cost of imported goods, and also the boost to domestic demand.
• Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more.
• Expectations of inflation – High inflation expectations causes workers to demand wage increases and firms to push up prices.

Video summary

Factors affecting inflation

1. demand-pull inflation.

If the economy is at or close to full employment, then an increase in aggregate demand (AD) leads to an increase in the price level (PL). As firms reach full capacity, they respond by putting up prices leading to inflation. Also, near full employment with labour shortages, workers can get higher wages which increase their spending power.

AD can increase due to an increase in any of its components C+I+G+X-M

We tend to get demand-pull inflation if economic growth is above the long-run trend rate of growth . The long-run trend rate of economic growth is the average sustainable rate of growth and is determined by the growth in productivity. Demand-pull inflation can be caused by factors such as

• Higher wages.
• Increased consumer confidence.
• Rising house prices – causing positive wealth effect.

Example of demand-pull inflation in the UK

2. Cost-push inflation

If there is an increase in the costs of firms, then businesses will pass this on to consumers. There will be a shift to the left in the SRAS.

Cost-push inflation can be caused by many factors

i) Rising wages If trades unions can present a united front then they can bargain for higher wages. Rising wages are a key cause of cost-push inflation because wages are the most significant cost for many firms. (higher wages may also contribute to rising demand) See also wage-push inflation.

ii) Import prices One-third of all goods are imported in the UK. If there is a devaluation, then import prices will become more expensive leading to an increase in inflation. A devaluation/depreciation means the Pound is worth less. Therefore we have to pay more to buy the same imported goods.

In 2011/12, the UK experienced a rise in cost-push inflation, partly due to the depreciation of the Pound against the Euro. (also due to higher taxes)

In 2022, the UK experienced more cost-push inflation due to rising oil, gas prices, Ukraine conflict, Brexit cost issues, depreciation in Pound, Covid supply constraints.

iii) Raw material prices The best example is the price of oil. If the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost-push inflation. E.g., in 1974 there was a spike in the price of oil causing a period of high inflation around the world.

4. Higher inflation expectations

Once inflation sets in, it is difficult to reduce inflation. For example, higher prices will cause workers to demand higher wages causing a wage-price spiral . Therefore, expectations of inflation are important. If people expect high inflation, it tends to be self-fulfilling. When expectations are low, temporary rise in prices tend to be short-lived and fade away.

5. Printing more money

If the Central Bank prints more money, you would expect to see a rise in inflation. This is because the money supply plays an important role in determining prices. If there is more money chasing the same amount of goods, then prices will rise. Hyperinflation is usually caused by an extreme increase in the money supply.

However, in exceptional circumstances – such as liquidity trap/recession, it is possible to increase the money supply without causing inflation. This is because, in a recession, an increase in the money supply may just be saved, e.g. banks don’t increase lending but just keep more bank reserves.

See: The link between money supply and inflation

6. Higher taxes

If the government put up taxes, such as VAT and Excise duty, this will lead to higher prices, and therefore CPI will increase. However, these tax rises are likely to be one-off increases. There is even a measure of inflation (CPI-CT) that ignores the effect of temporary tax rises/decreases.

7. Declining productivity

If firms become less productive and allow costs to rise, this invariably leads to higher prices.

8. Profit push inflation

When firms push up prices to get higher rates of inflation. This is more likely to occur during strong economic growth.

9. Monetary and fiscal policy

The attitude of the monetary authorities is important; for example, if there was an increase in AD and the monetary authorities accommodated this by increasing the money supply then there would be a rise in the price level.

• Different types of inflation
• The link between devaluation and inflation
• Why printing money causes inflation

Brought to you by:

What Causes Inflation?

By: Walter Frick

Why your money is worth less than it used to be.

• Length: 2124 word count
• Publication Date: Dec 23, 2022
• Discipline: Economics
• Product #: H07F62-PDF-ENG

What's included:

• Educator Copy

$4.50 per student

degree granting course

$7.95 per student

non-degree granting course

Get access to this material, plus much more with a free Educator Account:

• Access to world-famous HBS cases
• Up to 60% off materials for your students
• Resources for teaching online
• Tips and reviews from other Educators

Already registered? Sign in

• Student Registration
• Non-Academic Registration
• Included Materials

What causes inflation? There is no one answer, but like so much of macroeconomics it comes down to a mix of output, money, and expectations. Supply shocks can lower an economy’s potential output, driving up prices. An increase in the money supply can stoke demand, driving up prices. And the expectation of inflation can become a self-fulfilling cycle as workers and companies demand higher wages and set higher prices.

Dec 23, 2022

Discipline:

Harvard Business Review Digital Article

H07F62-PDF-ENG

2124 word count

We use cookies to understand how you use our site and to improve your experience, including personalizing content. Learn More . By continuing to use our site, you accept our use of cookies and revised Privacy Policy .

• Meaning and Causes of Inflation

Demand-Pull Inflation, Cost-push inflation, Supply-side inflation Open Inflation, Repressed Inflation, Hyper-Inflation, are the different types of inflation . Increase in public spending, hoarding, tax reductions, price rise in international markets are the causes of inflation. These factors lead to rising prices. Also, increasing demands causes higher prices which leads to Inflation. In this article, we will discuss the meaning of inflation and what causes it.

Suggested Videos

What is inflation.

According to many classical writers, inflation is a situation when too much money chases too few goods and services. Inflation is measured by the Consumer Price Index(CPI).

Therefore, there is an imbalance between the money supply and the Gross Domestic Product (GDP). There are many types of inflation like demand-pull inflation, cost-push inflation, supply-side inflation. But Inflation can be divided into two broad types:

• Open inflation – when the price level in an economy rises continuously and
• Repressed inflation – when the economy suffers from inflation without any apparent rise in prices.

Causes of Inflation

• Primary Causes
• Increase in Public Spending

Deficit Financing of Government Spending

• Increased Velocity of Circulation
• Population Growth
• Genuine Shortage

Trade Unions

• Tax Reduction

The imposition of Indirect Taxes

• Price-rise in the International Markets

Having understood the inflation meaning, let’s take a quick look at the factors that cause inflation.

In an economy, when the demand for a commodity exceeds its supply, then the excess demand pushes the price up. On the other hand, when the factor prices increase, the cost of production rises too. This leads to an increase in the price level as well.

In any modern economy , Government spending is an important element of the total spending. It is also an important determinant of aggregate demand .

Usually, in lesser developed economies, the Govt. spending increases which invariably creates inflationary pressure on the economy.

There are times when the spending of Government increases beyond what taxation can finance. Therefore, in order to incur the extra expenditure, the Government resorts to deficit financing.

For example, it prints more money and spends it. This, in turn, adds to inflationary pressure.

In an economy, the total use of money = the money supply by the Government x the velocity of circulation of money.

When an economy is going through a booming phase, people tend to spend money at a faster rate increasing the velocity of circulation of money.

As the population grows, it increases the total demand in the market. Further, excessive demand creates inflation.

Hoarders are people or entities who stockpile commodities and do not release them to the market. Therefore, there is an artificially created demand excess in the economy. This also leads to inflation.

It is possible that at certain times, the factors of production are short in supply. This affects production. Therefore, supply is less than the demand, leading to an increase in prices and inflation.

In an economy, the total production must fulfill the domestic as well as foreign demand. If it fails to meet these demands, then exports create inflation in the domestic economy.

Trade union work in favor of the employees. As the prices increase, these unions demand an increase in wages for workers. This invariably increases the cost of production and leads to a further increase in prices.

While taxes are known to increase with time, sometimes, Governments reduce taxes to gain popularity among people. The people are happy because they have more money in their hands.

However, if the rate of production does not increase with a corresponding rate, then the excess cash in hand leads to inflation.

Taxes are the primary source of revenue for a Government. Sometimes, Governments impose indirect taxes like excise duty, VAT, etc. on businesses.

As these indirect taxes increase the total cost for the manufacturers and/or sellers, they increase the price of the product to have a minimal impact on their profits.

Some products require to import commodities or factors of production from the international markets like the United States. If these markets raise prices of these commodities or factors of production, then the overall production cost in India increases too. This leads to inflation in the domestic market.

• Non-economic Reasons

There are several non-economic factors which can cause inflation in an economy. For example, if there is a flood, then crops are destroyed. This reduces the supply of agricultural products leading to an increase in the prices of the commodities .

Investment in Gold, Real estate, stocks, mutual funds, and other assets are some of the ways to deal with Inflation.

Solved Question on Meaning and Causes of Inflation

Q1. what is inflation.

Answer: Inflation is a situation when too much money is chasing too few goods and services in an economy. Hence, an imbalance exists between the GDP and the total money supply.

As per Keynes, inflation is an imbalance between the aggregate demand and aggregate supply of goods and services. If the aggregate demand is more than the aggregate supply, prices rise, leading to inflation.

Q2. What are the causes of inflation?

Answer: If the demand for a commodity exceeds its supply, then the excess demand increases the price of the commodity. Also, if the price of the factors of production increases, the price of the commodity increases too. The common causes that led to inflation are:

• Deficit Financing
• Imposition of Indirect Taxes

Customize your course in 30 seconds

Which class are you in.

• Forms of Inflation
• Definition and Functions of Money
• Impacts of Inflation
• Quantity Theory of Money
• Control Of Inflation
• Effects of Inflation on Production and Distribution of Wealth

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Download the App

Inflation: Types, Causes and Effects (With Diagram)

Inflation and unemployment are the two most talked-about words in the contemporary society.

These two are the big problems that plague all the economies.

Almost everyone is sure that he knows what inflation exactly is, but it remains a source of great deal of confu­sion because it is difficult to define it unam­biguously.

1. Meaning of Inflation:

Inflation is often defined in terms of its supposed causes. Inflation exists when money supply exceeds available goods and services. Or inflation is attributed to budget deficit financing. A deficit budget may be financed by the additional money creation. But the situation of monetary expansion or budget deficit may not cause price level to rise. Hence the difficulty of defining ‘inflation’.

ADVERTISEMENTS:

Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or aver­age of prices’. In other words, inflation is a state of rising prices, but not high prices.

It is not high prices but rising price level that con­stitute inflation. It constitutes, thus, an over­all increase in price level. It can, thus, be viewed as the devaluing of the worth of money. In other words, inflation reduces the purchasing power of money. A unit of money now buys less. Inflation can also be seen as a recurring phenomenon.

While measuring inflation, we take into ac­count a large number of goods and services used by the people of a country and then cal­culate average increase in the prices of those goods and services over a period of time. A small rise in prices or a sudden rise in prices is not inflation since they may reflect the short term workings of the market.

It is to be pointed out here that inflation is a state of disequilib­rium when there occurs a sustained rise in price level. It is inflation if the prices of most goods go up. Such rate of increases in prices may be both slow and rapid. However, it is difficult to detect whether there is an upward trend in prices and whether this trend is sus­tained. That is why inflation is difficult to define in an unambiguous sense.

Let’s measure inflation rate. Suppose, in December 2007, the consumer price index was 193.6 and, in December 2008, it was 223.8. Thus, the inflation rate during the last one year was

223.8- 193.6/ 193.6 x 100 = 15.6

As inflation is a state of rising prices, de­flation may be defined as a state of falling prices but not fall in prices. Deflation is, thus, the opposite of inflation, i.e., a rise in the value of money or purchasing power of money. Disinflation is a slowing down of the rate of inflation.

2. Types of Inflation:

As the nature of inflation is not uniform in an economy for all the time, it is wise to distin­guish between different types of inflation. Such analysis is useful to study the distribu­tional and other effects of inflation as well as to recommend anti-inflationary policies. Infla­tion may be caused by a variety of factors. Its intensity or pace may be different at different times. It may also be classified in accordance with the reactions of the government toward inflation.

Thus, one may observe different types of inflation in the contemporary society:

A. On the Basis of Causes:

(i) Currency inflation:

This type of infla­tion is caused by the printing of cur­rency notes.

(ii) Credit inflation:

Being profit-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs. Such credit expansion leads to a rise in price level.

(iii) Deficit-induced inflation:

The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget deficit, any price rise may the be called the deficit-induced inflation.

(iv) Demand-pull inflation:

An increase in aggregate demand over the available output leads to a rise in the price level. Such inflation is called demand-pull in­flation (henceforth DPI). But why does aggregate demand rise? Classical economists attribute this rise in aggre­gate demand to money supply. If the supply of money in an economy ex­ceeds the available goods and services, DPI appears. It has been described by Coulborn as a situation of “too much money chasing too few goods.”

Keynesians hold a different argu­ment. They argue that there can be an autonomous increase in aggregate de­mand or spending, such as a rise in con­sumption demand or investment or government spending or a tax cut or a net increase in exports (i.e., C + I + G + X – M) with no increase in money sup­ply. This would prompt upward adjust­ment in price. Thus, DPI is caused by monetary factors (classical adjustment) and non-monetary factors (Keynesian argument).

DPI can be explained in terms of Fig. 4.2, where we measure output on the horizontal axis and price level on the vertical axis. In Range 1, total spending is too short of full employment out­put, Y F . There is little or no rise in the price level. As demand now rises, out­put will rise. The economy enters Range 2, where output approaches towards full employment situation. Note that in this region price level begins to rise. Ul­timately, the economy reaches full em­ployment situation, i.e., Range 3, where output does not rise but price level is pulled upward. This is demand-pull in­flation. The essence of this type of in­flation is that “too much spending chas­ing too few goods.”

(v) Cost-push inflation:

Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation (henceforth CPI). Cost of pro­duction may rise due to an increase in the prices of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not completely market-determinded. Higher wage means high cost of production. Prices of commodities are thereby increased.

A wage-price spiral comes into opera­tion. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Thus, we have two im­portant variants of CPI wage-push in­flation and profit-push inflation.

Any­way, CPI stems from the leftward shift of the aggregate supply curve:

B. On the Basis of Speed or Intensity:

(i) Creeping or Mild Inflation:

If the speed of upward thrust in prices is slow but small then we have creeping inflation. What speed of annual price rise is a creeping one has not been stated by the economists. To some, a creeping or mild inflation is one when annual price rise varies between 2 p.c. and 3 p.c. If a rate of price rise is kept at this level, it is con­sidered to be helpful for economic development. Others argue that if annual price rise goes slightly beyond 3 p.c. mark, still then it is considered to be of no danger.

(ii) Walking Inflation:

If the rate of annual price increase lies between 3 p.c. and 4 p.c., then we have a situation of walking inflation. When mild inflation is allowed to fan out, walking inflation appears. These two types of inflation may be described as ‘moderate inflation’.

Often, one-digit inflation rate is called ‘moder­ate inflation’ which is not only predict­able, but also keep people’s faith on the monetary system of the country. Peoples’ confidence get lost once moderately maintained rate of inflation goes out of control and the economy is then caught with the galloping inflation.

(iii) Galloping and Hyperinflation:

Walking inflation may be converted into running inflation. Running inflation is danger­ous. If it is not controlled, it may ulti­mately be converted to galloping or hyperinflation. It is an extreme form of inflation when an economy gets shatter­ed.”Inflation in the double or triple digit range of 20, 100 or 200 p.c. a year is labelled “galloping inflation”.

(iv) Government’s Reaction to Inflation:

In­flationary situation may be open or suppressed. Because of anti-infla­tionary policies pursued by the govern­ment, inflation may not be an embar­rassing one. For instance, increase in income leads to an increase in con­sumption spending which pulls the price level up.

If the consumption spending is countered by the govern­ment via price control and rationing device, the inflationary situation may be called a suppressed one. Once the government curbs are lifted, the sup­pressed inflation becomes open infla­tion. Open inflation may then result in hyperinflation.

3. Causes of Inflation:

Inflation is mainly caused by excess demand/ or decline in aggregate supply or output. Former leads to a rightward shift of the aggregate demand curve while the latter causes aggregate supply curve to shift left­ward. Former is called demand-pull inflation (DPI), and the latter is called cost-push infla­tion (CPI). Before describing the factors, that lead to a rise in aggregate demand and a de­cline in aggregate supply, we like to explain “demand-pull” and “cost-push” theories of inflation.

(i) Demand-Pull Inflation Theory:

There are two theoretical approaches to the DPI—one is classical and other is the Keynesian.

According to classical economists or mon­etarists, inflation is caused by an increase in money supply which leads to a rightward shift in negative sloping aggregate demand curve. Given a situation of full employment, classi­cists maintained that a change in money supply brings about an equiproportionate change in price level.

That is why monetarists argue that inflation is always and everywhere a monetary phenomenon. Keynesians do not find any link between money supply and price level causing an upward shift in aggregate demand.

According to Keynesians, aggregate demand may rise due to a rise in consumer demand or investment demand or govern­ment expenditure or net exports or the com­bination of these four components of aggreate demand. Given full employment, such in­crease in aggregate demand leads to an up­ward pressure in prices. Such a situation is called DPI. This can be explained graphically.

Just like the price of a commodity, the level of prices is determined by the interaction of aggregate demand and aggregate supply. In Fig. 4.3, aggregate demand curve is negative sloping while aggregate supply curve before the full employment stage is positive sloping and becomes vertical after the full employ­ment stage is reached. AD 1 is the initial aggregate demand curve that intersects the aggregate supply curve AS at point E 1 .

The price level, thus, determined is OP 1 . As ag­gregate demand curve shifts to AD 2 , price level rises to OP 2 . Thus, an increase in aggre­gate demand at the full employment stage leads to an increase in price level only, rather than the level of output. However, how much price level will rise following an increase in aggregate demand depends on the slope of the AS curve.

(ii) Causes of Demand-Pull Inflation:

DPI originates in the monetary sector. Mon­etarists’ argument that “only money matters” is based on the assumption that at or near full employment excessive money supply will in­crease aggregate demand and will, thus, cause inflation.

An increase in nominal money supply shifts aggregate demand curve rightward. This enables people to hold excess cash bal­ances. Spending of excess cash balances by them causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply.

Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. There may be an autonomous increase in business investment or government expendi­ture. Government expenditure is inflationary if the needed money is procured by the gov­ernment by printing additional money.

In brief, increase in aggregate demand i.e., in­crease in (C + I + G + X – M) causes price level to rise. However, aggregate demand may rise following an increase in money supply gen­erated by the printing of additional money (classical argument) which drives prices up­ward. Thus, money plays a vital role. That is why Milton Friedman argues that inflation is always and everywhere a monetary phenom­enon.

There are other reasons that may push ag­gregate demand and, hence, price level up­wards. For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries. Additional purchasing power means additional aggregate demand. Purchasing power and, hence, aggregate de­mand may also go up if government repays public debt.

Again, there is a tendency on the part of the holders of black money to spend more on conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors.

(iii) Cost-Push Inflation Theory:

In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usu­ally associated with non-monetary factors. CPI arises due to the increase in cost of produc­tion. Cost of production may rise due to a rise in cost of raw materials or increase in wages.

However, wage increase may lead to an in­crease in productivity of workers. If this hap­pens, then the AS curve will shift to the right- ward not leftward—direction. We assume here that productivity does not change in spite of an increase in wages.

Such increases in costs are passed on to consumers by firms by rais­ing the prices of the products. Rising wages lead to rising costs. Rising costs lead to rising prices. And, rising prices again prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts. This causes aggregate supply curve to shift leftward.

This can be demonstrated graphically where AS 1 is the initial aggregate supply curve. Below the full employment stage this AS curve is positive sloping and at full em­ployment stage it becomes perfectly inelastic.

Intersection point (E 1 ) of AD 1 and AS 1 curves determine the price level (OP 1 ). Now there is a leftward shift of aggregate supply curve to AS 2 . With no change in aggregate demand, this causes price level to rise to OP 2 and output to fall to OY 2 . With the reduction in output, employment in the economy de­clines or unemployment rises. Further shift in AS curve to AS 3 results in a higher price level (OP 3 ) and a lower volume of aggregate out­put (OY 3 ). Thus, CPI may arise even below the full employment (Y F ) stage.

(iv) Causes of Cost-Push Inflation:

It is the cost factors that pull the prices up­ward. One of the important causes of price rise is the rise in price of raw materials. For in­stance, by an administrative order the govern­ment may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to an upward pres­sure on cost of production.

Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC com­pels the government to increase the price of petrol and diesel. These two important raw materials are needed by every sector, espe­cially the transport sector. As a result, trans­port costs go up resulting in higher general price level.

Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade unions demand higher money wages as a compen­sation against inflationary price rise. If in­crease in money wages exceed labour produc­tivity, aggregate supply will shift upward and leftward. Firms often exercise power by push­ing prices up independently of consumer de­mand to expand their profit margins.

Fiscal policy changes, such as increase in tax rates also leads to an upward pressure in cost of production. For instance, an overall in­crease in excise tax of mass consumption goods is definitely inflationary. That is why govern­ment is then accused of causing inflation.

Finally, production setbacks may result in decreases in output. Natural disaster, gradual exhaustion of natural resources, work stop­pages, electric power cuts, etc., may cause ag­gregate output to decline. In the midst of this output reduction, artificial scarcity of any goods created by traders and hoarders just simply ignite the situation.

Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors. A particular factor cannot be held responsible for any inflationary price rise.

4. Effects of Inflation:

People’s desires are inconsistent. When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up. Such a happy outcome may arise for some individuals; “but, when this happens, others will be getting the worst of both worlds.”

When price level goes up, there is both a gainer and a loser. To evaluate the conse­quence of inflation, one must identify the na­ture of inflation which may be anticipated and unanticipated. If inflation is anticipated, peo­ple can adjust with the new situation and costs of inflation to the society will be smaller.

In reality, people cannot predict accurately fu­ture events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely. This creates various problems.

One can study the effects of unanticipated inflation under two broad head­ings:

(a) Effect on distribution of income and wealth; and

(b) Effect on economic growth.

(a) Effects of Inflation on Distribution of Income and Wealth:

During inflation, usu­ally people experience rise in incomes. But some people gain during inflation at the ex­pense of others. Some individuals gain be­cause their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation. Thus, it redistributes income and wealth.

Though no conclusive evidence can be cited, it can be asserted that following catego­ries of people are affected by inflation differ­ently:

(i) Creditors and debtors:

Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking loan of Rs. 7 lakh from an in­stitution for 7 years.

The borrower now wel­comes inflation since he will have to pay less in real terms than when it was borrowed. Lender, in the process, loses since the rate of interest payable remains unaltered as per agree­ment. Because of inflation, the borrower is given ‘dear’ rupees, but pays back ‘cheap’ ru­pees. However, if in an inflation-ridden economy creditors chronically loose, it is wise not to advance loans or to shut down business.

Never does it happen. Rather, the loan-giving institution makes adequate safeguard against the erosion of real value. Above all, banks do not pay any interest on current account but charges interest on loans.

(ii) Bond and debenture-holders:

In an economy, there are some people who live on interest income—they suffer most. Bondhold­ers earn fixed interest income: These people suffer a reduction in real income when prices rise. In other words, the value of one’s sav­ings decline if the interest rate falls short of inflation rate. Similarly, beneficiaries from life insurance programmes are also hit badly by inflation since real value of savings deterio­rate.

(iii) Investors:

People who put their money in shares during inflation are expected to gain since the possibility of earning of business profit brightens. Higher profit induces own­ers of firm to distribute profit among inves­tors or shareholders.

(iv) Salaried people and wage-earners:

Any­one earning a fixed income is damaged by in­flation. Sometimes, unionised worker suc­ceeds in raising wage rates of white-collar workers as a compensation against price rise. But wage rate changes with a long time lag. In other words, wage rate increases always lag behind price increases. Naturally, inflation results in a reduction in real purchasing power of fixed income-earners.

On the other hand, people earning flexible incomes may gain during inflation. The nominal incomes of such people outstrip the general price rise. As a re­sult, real incomes of this income group in­crease.

(v) Profit-earners, speculators and black marketers:

It is argued that profit-earners gain from inflation. Profit tends to rise during inflation. Seeing inflation, businessmen raise the prices of their products. This results in a bigger profit. Profit margin, however, may not be high when the rate of inflation climbs to a high level.

However, speculators dealing in business in essential commodities usually stand to gain by inflation. Black marketers are also ben­efited by inflation.

Thus, there occurs a redistribution of in­come and wealth. It is said that rich becomes richer and poor becomes poorer during infla­tion. However, no such hard and fast gener­alisation can be made. It is clear that someone wins and someone loses during inflation.

These effects of inflation may persist if in­flation is unanticipated. However, the redistributive burdens of inflation on income and wealth are most likely to be minimal if inflation is anticipated by the people. With anticipated inflation, people can build up their strategies to cope with inflation.

If the annual rate of inflation in an economy is anticipated correctly people will try to protect them against losses resulting from inflation. Workers will demand 10 p.c. wage increase if inflation is expected to rise by 10 p.c.

Similarly, a percent­age of inflation premium will be demanded by creditors from debtors. Business firms will also fix prices of their products in accordance with the anticipated price rise. Now if the en­tire society “learn to live with inflation”, the redistributive effect of inflation will be mini­mal.

However, it is difficult to anticipate prop­erly every episode of inflation. Further, even if it is anticipated it cannot be perfect. In addi­tion, adjustment with the new expected infla­tionary conditions may not be possible for all categories of people. Thus, adverse redistributive effects are likely to occur.

Finally, anticipated inflation may also be costly to the society. If people’s expectation regarding future price rise become stronger they will hold less liquid money. Mere hold­ing of cash balances during inflation is unwise since its real value declines. That is why peo­ple use their money balances in buying real estate, gold, jewellery, etc. Such investment is referred to as unproductive investment. Thus, during inflation of anticipated variety, there occurs a diversion of resources from priority to non-priority or unproductive sectors.

(b) Effect on Production and Economic Growth:

Inflation may or may not result in higher output. Below the full employment stage, inflation has a favourable effect on production. In general, profit is a rising function of the price level. An inflationary situation gives an incen­tive to businessmen to raise prices of their prod­ucts so as to earn higher volume of profit. Ris­ing price and rising profit encourage firms to make larger investments.

As a result, the multi­plier effect of investment will come into opera­tion resulting in a higher national output. How­ever, such a favourable effect of inflation will be temporary if wages and production costs rise very rapidly.

Further, inflationary situation may be as­sociated with the fall in output, particularly if inflation is of the cost-push variety. Thus, there is no strict relationship between prices and output. An increase in aggregate demand will increase both prices and output, but a supply shock will raise prices and lower output.

Inflation may also lower down further pro­duction levels. It is commonly assumed that if inflationary tendencies nurtured by experi­enced inflation persist in future, people will now save less and consume more. Rising sav­ing propensities will result in lower further outputs.

One may also argue that inflation creates an air of uncertainty in the minds of business community, particularly when the rate of in­flation fluctuates. In the midst of rising infla­tionary trend, firms cannot accurately estimate their costs and revenues. That is, in a situa­tion of unanticipated inflation, a great deal of risk element exists.

It is because of uncertainty of expected inflation, investors become reluc­tant to invest in their business and to make long-term commitments. Under the circum­stance, business firms may be deterred in in­vesting. This will adversely affect the growth performance of the economy.

However, slight dose of inflation is neces­sary for economic growth. Mild inflation has an encouraging effect on national output. But it is difficult to make the price rise of a creep­ing variety. High rate of inflation acts as a dis­incentive to long run economic growth. The way the hyperinflation affects economic growth is summed up here. We know that hyper-inflation discourages savings.

A fall in savings means a lower rate of capital forma­tion. A low rate of capital formation hinders economic growth. Further, during excessive price rise, there occurs an increase in unpro­ductive investment in real estate, gold, jewel­lery, etc. Above all, speculative businesses flourish during inflation resulting in artificial scarcities and, hence, further rise in prices.

Again, following hyperinflation, export earn­ings decline resulting in a wide imbalances in the balance of payment account. Often gallop­ing inflation results in a ‘flight’ of capital to foreign countries since people lose confidence and faith over the monetary arrangements of the country, thereby resulting in a scarcity of resources. Finally, real value of tax revenue also declines under the impact of hyperinfla­tion. Government then experiences a shortfall in investible resources.

Thus economists and policymakers are unanimous regarding the dangers of high price rise. But the consequence of hyperinfla­tion are disastrous. In the past, some of the world economies (e.g., Germany after the First World War (1914-1918), Latin American coun­tries in the 1980s) had been greatly ravaged by hyperinflation.

The German inflation of 1920s was also catastrophic:

During 1922, the German price level went up 5,470 per cent. In 1923, the situation wors­ened; the German price level rose 1,300,000,000 (1.3 billion) times. By October of 1923, the post­age in the lightest letter sent from Germany to the United States was 200,000 marks. But­ter cost 1.5 million marks per pound, meat 2 million marks, a loaf of bread 200,000 marks, and an egg 60,000 marks! Prices increased so rapidly that waiters changed the prices on the menu several times during the course of a lunch!! Sometimes, customers had to pay the double price listed on the menu when they observed it first!!! A photograph of the period shows a German housewife starting the fire in her kitchen stove with paper money and children playing with bundles of paper money tied together into building blocks!

Currently (September 2008), Indian economy experienced an inflation rate of al­most 13 p.c.—an unprecedented one over the last 16 or 17 years. However, an all-time record in price rise in India was struck in 1974-75 when it rose more than 25 p.c. Anyway, peo­ple are ultimately harassed by the high dose of inflation. That is why, it is said that ‘infla­tion is our public enemy number one.’ Rising inflation rate is a sign of failure on the part of the government.

Related Articles:

• Demand Pull Inflation and Cost Push Inflation | Money
• Essay on the Causes of Inflation (473 Words)
• Cost-Push Inflation and Demand-Pull or Mixed Inflation
• Difference between Open Inflation and Suppressed Inflation

Advertisement

Supported by

Here’s What You Need to Know About America’s Super-Hot Inflation

Inflation is a tricky problem, but it has a few clear causes and consequences, and policymakers are working to bring it to heel.

• Share full article

By Jeanna Smialek

The government reported on Friday that consumer prices climbed 8.6 percent over the year through May, the fastest rate of increase in four decades.

Americans are confronting more expensive food, fuel and housing, and some are grasping for answers about what is causing the price burst, how long it might last and what can be done to resolve it.

There are few easy answers or painless solutions when it comes to inflation, which has jumped around the world as supply shortages collide with hot consumer demand. It is difficult to predict how long today’s price surge will drag on, and the main tool for fighting it is interest rate increases, which cool inflation by slowing the economy — potentially sharply.

Here’s a guide to understanding what’s happening with inflation and how to think about price gains when navigating this complicated moment in the U.S. and world economy.

What’s Driving Inflation

It can be helpful to think of the causes of today’s inflation as falling into three related buckets.

Strong demand. Consumers are spending big. Early in the pandemic, households amassed savings as they were stuck at home, and government support that continued into 2021 helped them put away even more money. Now people are taking jobs and winning wage increases. All of those factors have padded household bank accounts , enabling families to spend on everything from backyard grills and beach vacations to cars and kitchen tables.

Too few goods. As families have taken pandemic savings and tried to buy pickup trucks and computer screens, they have run into a problem: There have been too few goods to go around. Factory shutdowns tied to the pandemic, global shipping backlogs and reduced production have snowballed into a parts-and-products shortage. Because demand has outstripped the supply of goods, companies have been able to charge more without losing customers.

Now, China’s latest lockdowns are exacerbating supply chain snarls. At the same time, the war in Ukraine is cutting into the world’s supply of food and fuel, pushing overall inflation higher and feeding into the cost of other products and services. Gas prices are averaging around $5 a gallon nationally, up from just over $3 a year ago.

Service-sector pressures. More recently, people have been shifting their spending away from things and back toward experiences as they adjust to life with the coronavirus — and inflation has been bubbling up in service industries. Rents are climbing swiftly as Americans compete for a limited supply of apartments, restaurant bills are heading higher as food and labor costs rise, and airline tickets and hotel rooms cost more because people are eager to travel and because fuel and labor are more expensive.

You might be wondering: What role does corporate greed play in all this? It is true that companies have been raking in unusually big profits as they raise prices by more than is needed to cover rising costs. But they are able to do that partly because demand is so strong — consumers are spending right through price increases. It is unclear how long that pricing power will last. Some companies, like Target , have already signaled that they will begin to reduce prices on some products as they try to clear out inventory and keep customers coming.

How Is Inflation Measured?

Economists and policymakers are closely watching America’s two primary inflation gauges: The Consumer Price Index , which was released on Friday, and the Personal Consumption Expenditures index.

The C.P.I. captures how much consumers pay for things they buy, and it comes out earlier, making it the nation’s first clear glimpse at what inflation did the month before. Data from the index is also used to come up with the P.C.E. figures.

The P.C.E. index, which will be released next on June 30, tracks how much things actually cost . For instance, it counts the price of health care procedures even when the government and insurance help pay for them. It tends to be less volatile, and it is the index the Federal Reserve looks to when it tries to achieve 2 percent inflation on average over time. As of April, the P.C.E. index was climbing 6.3 percent compared with the prior year — more than three times the central bank target.

Fed officials are paying close attention to changes in month-to-month inflation to get a sense of its momentum.

Policymakers are also particularly attuned to the so-called core inflation measure, which strips out food and fuel prices. While groceries and gas make up a big part of household budgets, they also jump around in price in response to changes in global supply. As a result, they don’t give as clear a read on the underlying inflationary pressures in the economy — the ones the Fed believes it can do something about.

“I’m going to be looking to see a consistent string of decelerating monthly prints on core inflation before I’m going to feel more confident that we’re getting to the kind of inflation trajectory that’s going to get us back to our 2 percent goal,” Lael Brainard, the vice chair of the Fed and one of its key public messengers, said during a CNBC interview last week.

What Can Slow the Rapid Price Gains?

How long prices will continue to climb rapidly is anyone’s guess: Inflation has confounded experts repeatedly since the pandemic took hold in 2020. But based on the drivers behind today’s hot prices, a few outcomes appear likely.

For one, quick inflation seems unlikely to go away entirely on its own. Wages are climbing much more rapidly than normal. That means unless companies suddenly get more efficient, they will probably try to continue to increase prices to cover their labor costs.

As a result, the Fed is raising interest rates to slow demand and tamp down wage and price growth. The central bank’s policy response means that the economy is almost surely headed for a slowdown. Already, higher borrowing costs have begun to cool off the housing market .

The question — and big uncertainty — is just how much Fed action will be needed to bring inflation under control. If America gets lucky and supply chain shortages ease, the Fed might be able to let the economy down gently, slowing the job market enough to temper wage growth without causing a recession.

In that optimistic scenario, often called a soft landing, companies will be forced to lower their prices and pare their big profits as supply and demand come into balance and they compete for customers again.

But it is also possible that supply issues will persist, leaving the Fed with a more difficult task: raising rates more drastically to slow demand enough to bring price increases under control.

“The path toward a soft landing is a very narrow one — narrow to the point where we expect a recession as the baseline,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. That’s partly because consumer spending shows little sign of cracking so far.

Households still have about $2.3 trillion of excess savings to help them weather higher rates and prices, Mr. Luzzetti’s team has estimated.

“There continues to be deep pockets of pent-up demand,” Anthony G. Capuano, chief executive of the hotel company Marriott International, said during a June 7 event. “Unlike previous economic cycles and economic downturns, here you have this added dimension, which was folks were locked down for 12 to 24 months.”

Jeanna Smialek writes about the Federal Reserve and the economy for The Times. She previously covered economics at Bloomberg News.  More about Jeanna Smialek

Intelligent Investment

Inflation: Sources, Solutions and Consequences

August 11, 2022 13 Minute Read

Inflation caught us all by surprise!

Looking for a pdf of this content.

The near vertical rise in inflation in the U.S., Europe and to a lesser extent Asia Pacific caught economists, central banks and policymakers by surprise. Previous periods of high inflation such, as in the 1970s, emerged only after building up a head of steam over three to four years.

Figure 1: We Haven’t Seen this Since the 1970s

Source: BLS, Eurostat, ONS (RPI), CBRE Research, Q3 2022.

Inflation is now front of mind and is one of the main factors driving down consumer confidence to recession-era levels. While many consumers have not significantly cut back on spending, sentiment is increasingly fragile.

Figure 2: Driving Confidence to Recession Levels

Source: University of Michigan, ECFIN, CBRE Research Q3 2022.

Why did it happen?

High inflation has its origins in the response to the COVID-19 pandemic, when governments restricted social contact through lockdowns. This was accompanied by huge fiscal and monetary stimulus to support the economy, leading to a surge in money supply.

Figure 3: Money Supply (M2), Billions in USD, GBP and EUR

Source: Macrobond, CBRE Research Q2 2022.

With the public receiving stimulus money but forced to stay home, consumption was channeled away from services, such as food and beverage, entertainment and travel, and to the goods sector.

Figure 4: The Pandemic Focused Demand in the Goods Sector

This phenomenon occurred at a time when the pandemic significantly disrupted global supply chains. Excess demand for goods at a time of restricted supply inevitably drove up prices.

Stimulus money and record low mortgage rates also led to a housing boom with residential prices in the U.S. rising by up to 50% in some markets since the beginning of 2019.

Other factors underpinning inflation include a spike in oil prices resulting from major producers keeping production low despite a strong rebound in demand after economies re-opened.

Figure 5: Then the Oil Price Spiked

Source: "US Online Grocery Snapshot: Q4 2021", Forrester, February 3, 2022.

Russia’s invasion of Ukraine added further impetus to inflation. Supply constraints and sanctions pushed up natural gas prices in Europe, exacerbating the demand/supply imbalance in the global economy. Both countries are also major commodities producers, so the supply and cost of raw materials such as wheat has also been impacted.

Figure 6: Total Stock Levels of Primary Food Commodities, Rolling 4-Quarter Average

Source: BEA, CBRE Research Q2 2022.

Figure 7: Then it Hit the Labor Market

Source: Eurostat, ONS, BLS, CBRE Research, Q3 2022.

These factors have created an environment in which highly stimulated demand has converged with highly disrupted and restricted supply, driving up inflation.

Interest rate hikes are an inexact science, with the lag and intensity at which they impact the economy varying substantially. Central banks have nevertheless chosen to tackle inflation by taking demand out of the economy by raising rates. The hope is that while this may cause a mild recession, such an outcome would be more desirable than a potentially more severe economic contraction occurring later.

This approach has led to the sharpest increase in U.S. interest rates since 1994, with short-term rates likely to peak at around 3.75% and the fed funds rate set to go as high as 4.0%. The Eurozone has witnessed its first rate hikes since 2011 while rates in the UK are also heading up.

Figure 8: Interest Rates Have to Go Up

Source : Federal Reserve, ECB, CBRE Research, Q2 2022.

Figure 9: Interest Rates Have to Go Up

Higher rates have created some turbulence in the currency market, with US dollar strength and Euro weakness among the most prominent consequences. As the US dollar strengthens, the cost of imports and oil declines in the U.S., but the reverse is true for Europe.

Is there another way of looking at this? Did the pandemic turbo charge the end of the cycle that began in 2010?

G7 unemployment data show that geopolitics typically does not derail the economy. There have been four distinct cycles since 1980 followed by an abrupt, pandemic-related surge in unemployment in early 2020.

Figure 10: Geopolitics Does Not Typically Derail The Economy

Source: Eurostat, Wikipedia, CBRE Research, Q2 2022.

The subsequent sharp employment rebound has left the unemployment rate at the low level it was at prior to the onset of the pandemic, when the global economy was appearing likely to head into a recession.

The normal pattern of economic cycles is for interest rates to rise when unemployment gets low, triggering a recession.

The Economic Cycle and the Real Estate Cycle

There is a strong link between the economic and real estate cycles, with data showing a close correlation between unemployment and weighted average vacancy across sectors in the U.S. When unemployment rises, so does vacancy, with the same being true in Europe.

Figure 11: Unemployment and Vacancy Cycles in the U.S.

*Source: CBRE Research Q2 2022.

Figure 12: Unemployment and Vacancy Cycles in the U.S.

*Includes Germany, France, Italy, Spain and the Netherlands – weighted by GDP Source: CBRE Research Q2 2022.

CBRE has also identified a clear relationship between office rental growth and employment, both in the U.S. and Europe.

Figure 13: The Cycle is the Primary Driver of Office Rents

Source: FRED, CBRE Research Q2 2022.

Figure 14: The Cycle also Drives Rents in Europe

The obvious conclusion is that if the economic cycle has come to an end and unemployment is about to increase, vacancy will rise and rents will fall.

Asia Pacific

Inflation in the region remains more moderate compared with the U.S. and Europe. The latest data indicate a decline in the rate of inflation across most Asia Pacific markets in June after a period of sustained increases.

Although China is the only major global economy that has not yet seen a spike in inflation, it is grappling with other challenges, most notably a housing market slowdown resulting from previous attempts to wean the economy away from real estate.

Figure 15: China Housing Market Sales are Falling

China’s GDP grew 0.4% y-o-y but shrank 2.6% q-o-q in Q2 2022, signaling a recession, which is one factor why there is less inflation.

Economic weakness in China will gradually feed through to other economies in Asia in the coming months, easing inflationary impulses. Interest rates will also go up across the region to counter inflation.

Inflation and Building Management Costs

The cost of building services such as facilities management, engineering and maintenance has risen dramatically since the beginning of 2021, with sharp increases observed in both the CBRE Facilities Management Cost Index and costs for nonresidential maintenance and repair.

Figure 16: Facilities Management Will be Badly Hit

Source: FRED, CBRE Research Q3 2022.

While inflation in this sector will fall back when the global economy cools, this will take some time. Companies contemplating major office renovation or fit-outs or other significant CapEx are advised to delay plans until 2023 when building contractor prices should decline from current highs.

Consequences

A global recession is most likely on its way. There are reasons to think it will be a moderate recession – not as bad as the Global Financial Crisis:

• Corporate and consumer balance sheets are in reasonable shape, making severe cutbacks in employment or spending less likely. Corporations have had a hard time attracting and retaining talent after the pandemic and they are likely to hold on to skilled professionals as much as possible. Consumers still have cash accumulated during the pandemic lockdowns when it was difficult to spend.
• Northern European countries have very low levels of public debt. Governments have already started to spend to offset the negative effects of high energy prices.
• China has relatively low inflation and is ramping up its fiscal and monetary support for its economy.

On the other hand:

• Inflation is running hot, and central banks have vowed to bring it down. After more than ten years of near zero interest rates, it is not easy for central banks to calibrate interest rates in a way that gently brings down inflation. Central banks could tighten monetary too much, triggering a deeper downturn.
• Apart from higher borrowing costs, consumers are being squeezed by elevated energy and food prices. Even after inflation is under control, energy and food prices may not revert to prepandemic levels.

Recessions always impact real estate markets. They choke off occupier demand and release excess space onto the market, increasing vacancy and lowering rents. The digital economy and medical progress have created secular tailwinds that will mute the recession’s effect in sectors such as data centers, life sciences and industrial and logistics. Multifamily may benefit from reduced single-family home demand caused by higher mortgage rates. However, multifamily cannot avoid the effects of rising unemployment. Most of the rise in office vacancy has already taken place, and while the recession will delay full recovery, a shortage of Class A space is clearly emerging. Retail will feel the effects as consumers retrench, but the lack of new construction over the last ten years means that vacancy is unlikely to surge.

In capital markets, the cost of debt has risen by around 200 basis point in Europe and the US. This has already pushed cap rates out by 50 to 75 basis points, and more decompression is possible. However, inflation is expected to peak in the near term and rates will start to fall back in the middle of 2023. The opportunity to buy quality assets at ‘discounted’ values will not last long.

Richard Barkham, Ph.D.

Global Chief Economist, Global Head of Research, Head of Americas Research

• Phone +1 617 9125215

Insights in Your Inbox

Stay up to date on relevant trends and the latest research..

Sir TAUHEED's TUITION CENTER

At Sir Tauheed Tuition Center, we’re dedicated to helping students achieve their academic goals and reach their full potential.

• ENGLISH GRAMMAR COURSE IN ENGLISH
• ENGLISH GRAMMAR COURSE IN URDU/HINDI.
• LEARN ENGLISH VOCABULARY.

ESSAY ON "INFLATION: ITS CAUSES AND SOLUTIONS"

Essay on "inflation: its causes and solutions ".

Inflation is when prices go up over time. If you see that your favorite snacks or morning coffee are getting more expensive, that's inflation at work. But why do prices keep rising like this?

The major cause of the increase in the price level is an increase in money supply. It may be due to increase in currency or credit money. An increase in the stock of money induces people to demand more and more of goods and services. According to the Fisher’s Quantity Theory of Money, if there is an increase in the velocity of circulation of money it also leads to inflation. Investments also play an important role in producing inflation. At the moment of investment the economy’s stock of wealth and money expands and it results in inflation. Government of Pakistan has to make a lot of non-productive expenditures like defense etc. Such unproductive expenditures lead to the wastage of economy’s precious resources and also lead to inflation . Foreign aids are also a source of mobilization of resources form rich countries to poor countries. Due to demonstration effect people of our country want to copy the styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation.Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates inflation.

There are three main ways to control inflation. Firstly,  Central banks play a vital role in controlling inflation through monetary policy . They can increase interest rates, reduce the money supply, or employ a mix of tools to combat inflation. Secondly,   Governments can also step in to control inflation through fiscal policy . By adjusting taxes and government spending, they can either stimulate or slow down economic activity. Thirdly,  Increasing the production of goods and services can also combat inflation. Governments can introduce policies that incentivize businesses to produce more efficiently.

Conclusion:

Inflation is everywhere in an economy. Its rate is high in developing countries and is low in poor developed counties. Effective operation of monetary and fiscal policy is essential to control the inflation.

• ESSAY ON "PHYSICAL CLASSES VS ONLINE CLASSES"
• ESSAY ON "ELECTRONIC MEDIA VS PRINT MEDIA"
• ESSAY ON "THE IMPORTANCE OF MUSLIMS' UNITY IN THE WORLD"
• ESSAY ON "Independence Day of Pakistan"
• ESSAY ON "GLOBAL WARMING"
• ESSAY ON "QUAID-E-AZAM"

No comments:

Post a comment.

• Follow on Twitter
• Like on Facebook
• Subscribe on Youtube
• Follow on Instagram

Report Abuse

• LEARN ENGLISH VOCABULARY

Featured post

Examples of changing active to passive voice: mastering the art of active and passive voice ep# 17.

  EXAMPLES OF CHANGING ACTIVE TO PASSIVE VOICE Shifting Perspectives: Explore Examples of Changing Active to Passive Voice for Enhanced Writ...

Popular Posts

• Privacy Policy
• Terms and Conditions

Increasing Inflation Impact on Individuals Essay

Inflation refers to a general increase in the prices of basic commodities and services, usually taken to represent an average spending pattern (Mankiw, 2012). In simpler terms, inflation is the rise in the cost of living due to an exaggerated increase in commodity prices. As inflation sets in, both individuals, corporations, and the government usually feels its impacts. However, a significant increase in the level of inflation will cause numerous impacts on me as an individual.

Since inflation means a rise in prices of common and basic goods, my purchasing power will reduce since the income shall remain constant as prices rise up (Sexton, 2007). This is because the rate of inflation affects the currency’s purchasing power. As inflation rises, the value of the currency reduces proportionately or even at a higher rate pattern (Mankiw, 2012). Generally, the prevailing rate of inflation dictates the number of goods that I will be able to afford. As the cost of basic such as fuel prices, its trickle-down effects are manifold. The energy prices will increase the prices of foodstuffs such as grains since the machinery costs used in production shall have increased.

Because of a rise in the cost of living, it will lead to lower standards of living since inflation negatively influences the comfort of life. To demonstrate this impact, clearly, there shall be a shift from spending on leisure activities toward basic commodities.

Inflation influences budgeting and planning for investment. Ordinarily, inflation is a phenomenon that happens without the prior and perfect knowledge of an individual, and as such, planned budgets are affected. The confusion created by an uncertain increase in both costs and prices eventually hampers the planning process (Sexton, 2007). Similarly, the amount planned for investment will reduce hence causing a detriment in my overall investment base.

Inflation causes money to lose its value due to a rise in the price level. Since I am a regular saver, the rising inflation will affect me in the sense that I will lose confidence in the currency as a measure of value. This is because the rate of savings will be lower than the inflation resulting in a negative real interest rate on savings (Madura, 2006). For instance, if the per year inflation rate is at 6% while the nominal rate on savings is 3%, it means that the real interest rate on my savings is -3%.

The other effect of inflation will be tendencies of food shortages on the market occasioned by hoarding by sellers. Market analysis shows that an anticipated increase in inflation stimulates hoarding since sellers withhold goods with a view to selling at a higher price. Sellers will begin to cause physical scarcity of food and other products on the market since they would be anticipating better prices in the future (Sexton, 2007). As an individual, it will become difficult to access basic items, and if available, their prices will be excessively farther than what I can afford.

However, I will also be able to benefit from the government intervention plans and policy adjustments geared towards addressing inflation (Madura, 2006). The government’s policy to amend the nominal rates in order to cushion the savers will automatically be advantageous to me. As such, I will be motivated to increase my savings and investment in order to meet my future investment objectives.

Madura, J. (2006). Introduction to business . New York, NY: Cengage Learning.

Mankiw, N.G. (2012). Principles of macroeconomics (6 th .). Mason, OH: South-Western, Cengage Learning.

Sexton, R. L. (2007). Exploring Economics . New York, NY: Cengage Learning.

• Nominal versus Real Gross Domestic Product
• Nominal and Real GDP Growth Rates
• Economic Issues: Real and Nominal Variables
• Maintenance of Stable Pricing
• Inflation Expectations: Households and Forecasters
• Macroeconomic Elements: the Reduction of Oil Prices
• Inflation Targeting in Emerging Economies
• United Arab Emirates and Norway Economies
• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2021, January 23). Increasing Inflation Impact on Individuals. https://ivypanda.com/essays/increasing-inflation-impact-on-individuals/

"Increasing Inflation Impact on Individuals." IvyPanda , 23 Jan. 2021, ivypanda.com/essays/increasing-inflation-impact-on-individuals/.

IvyPanda . (2021) 'Increasing Inflation Impact on Individuals'. 23 January.

IvyPanda . 2021. "Increasing Inflation Impact on Individuals." January 23, 2021. https://ivypanda.com/essays/increasing-inflation-impact-on-individuals/.

1. IvyPanda . "Increasing Inflation Impact on Individuals." January 23, 2021. https://ivypanda.com/essays/increasing-inflation-impact-on-individuals/.

Bibliography

IvyPanda . "Increasing Inflation Impact on Individuals." January 23, 2021. https://ivypanda.com/essays/increasing-inflation-impact-on-individuals/.