An increase in general prices for goods and services is referred to as Inflation. If an inflation is to be considered, then the rise in prices must be widespread and occur over an extended time frame. In simple words, reflect changes in the economy as a whole must be reflected by the rise in prices. The value of money is reduced by the inflation. When inflation prevails in an economy, then for the same goods consumers have to spend more money and services they were previously able to purchase at lower prices.
Methods of Measuring Inflation
In order to measure inflation there are several methods.
The Consumer Price Index (CPI)
The most common measurement is the Consumer Price Index (CPI). As suggested by the name, by the CPI inflation is measured in terms of consumer prices.
Gross Domestic Product Deflator (GDP-Deflator)
Gross Domestic Product Deflator (GDP-Deflator) is another common method for measuring inflation. By the GDP-deflator inflation is assessed in the overall economy as it affects all branches of government and business, as well as consumers.
Employment Cost Index (ECI)
There are several other measures of inflation that are targeted towards particular economical sectors. For example, inflation is measured by the Employment Cost Index (ECI) as it occurs affects labor.
The focus of other measurements is on interest rates and the expectations of consumers or business people. As there are so many different ways of measuring inflation, so it looks quite difficult to figure out which one should be used and when. Basically, the method of measuring inflation depends on how you will use the measurements.
Comparing two sets of products
Comparing two sets of products is involved in one common way of measuring inflation. In order to note any price changes these products are compared at different times. If you are considering an increase in cost caused by inflation, then price changes cannot be due to improved quality. Furthermore, increase in price must affect a large number of products and services. Rising prices by which just a few products are affected are not considered inflation.
Cause of Inflation
It is a general acceptance that inflation is caused by increases in the supply of money. When too much money is printed then there is a natural rise of prices. It is asserted by many economists that money-related matters are the primary factor in setting inflation rates. While others assert that the chief factors leading to inflation are the movements of money and interest rates, in conjunction with output. However, there are other theories also.
While inflation is considered wholly negative by many consumers, that is not always the case with economists. Surprisingly, small-scale inflation can be viewed as positive in terms of the overall economy. For example, inflation is often viewed as an incentive for individuals so that they may invest, instead of merely saving. It also affords central banks the maneuverability to stimulate the economy.
People who liked this Post also read
Posted by R. MAK. in World Economy · 0 Comment
