Inflation, Money and Price of Goods, How are they Linked?
Inflation is the increasing rate of general level of price of goods and services in a particular period of time. Consequently, purchasing power decreases. Consumer Price Index (CPI) is a most common way of inflation measurement. CPI used to evaluate the price increase and decrease of fundamental goods and services. Another important measurement of inflation is Gross Domestic Product (GDP) deflator. It used to evaluate the changes of price in goods that manufactures or produces on domestic level. Basically, the value of your money decrease in inflation and goods and services become more expensive to purchase.
Causes:Following are the reasons of inflation. The demand of economy for goods and services is more than the availability. It is known as demand pull inflation. The shortage of supply gives a chance to the sellers to become money maker. And they set the prices according to their own choice to the highest level. Until the balance occurs between demand and supply. The shortage of the available supply of the specific product or good will affects the economy by increasing prices. It is known as cost push theory or supply shock inflation. Money supply is also a reason of inflation. Economist believes that if money supply will not controlled effectively by the Federal Reserve, it will cause faster growing rate than the real Gross Domestic Product. Simply, it will increase prices and then inflation will increase automatically. Inflation can be created artificially by circular increase in the demand of consumer. And the prices of goods and services will increase due to the consequent increase in the producer costs.
Effects:When the equilibrium between demand and supply become difficult to control, the expenditures of consumers will change and the producers will bear it and obligatory will cut the outcome. It will cause high rates of unemployment. Whenever extremes occur in supply and demand structure, instability will created. As inflation raise the value of money decrease day after day.So people tend to expend all their money on something else as the saving is equal to watch the down fall of the value of your money. Uncertainty is always exists in the business, but while inflation this risk is very high due to the unsteadiness of prices. The great example of this is the stock market internet euphoria in 1998-2000. This fast increase of rates in stock prices ultimately become unstable and caused disastrous down fall.