write an essay about inflation

Essay on Inflation: Types, Causes and Effects

Essay on Inflation!

Essay on the Meaning of Inflation:

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.

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 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’ .

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 price level, but not rise in the price level. It is not high prices but rising prices that constitute inflation.

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It is an increase in the overall price level. A small rise in prices or a sudden rise in prices is not inflation since these 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. 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 × 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., rise in the value or purchasing power of money. Disinflation is a slowing down of the rate of inflation.

Essay on the 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) According to 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 be called 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” .

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 “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 increase in the price of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not market-determined. Higher wage means higher 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.

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.

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. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money.

In brief, an 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 believes 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 on conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors.

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 the non-monetary factors. CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in the cost of raw materials or 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 (Fig. 11.4) 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 determines the price level.

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 the AS curve to AS 2 results in 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.

Causes of CPI :

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 exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing up prices independently of consumer demand to expand their profit margins.

Fiscal policy changes, such as an increase in tax rates 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, 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 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 inflationary price rise.

Essay on the 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.” Since inflation reduces purchasing power it is bad.

The old people are in the habit of recalling the days when the price of say, meat per kilogram cost just 10 rupees. Today it is Rs. 250 per kilogram. This is true for all other commodities. When they enjoyed a better living standard. Imagine today, how worse we are! But meanwhile, wages and salaries of people have risen to a great height, compared to the ‘good old days’. This goes unusually untold.

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:

(i) Effect on distribution of income and wealth

(ii) Effect on economic growth.

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

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 a 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.

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 business profit brightens. Higher profit induces owners of firms to distribute profit among investors or shareholders.

iv. Salaried People and Wage-Earners:

Anyone earning a fixed income is damaged by inflation. Sometimes, unionized 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 Marketeers:

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 marketeers 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 generalizations can be made. It is clear that someone wins and someone loses from 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 “learns 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 doses 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 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. 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 hyperinflation 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 imbalance in the balance of payments 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 policy makers are unanimous regarding the dangers of high price rise. But the consequence of hyperinflation is 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 times. By October of 1923, the postage of 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 double the price listed on the menu when they observed it first!!!

During October 2008, Zimbabwe, under the President-ship of Robert G. Mugabe, experienced 231,000,000 p.c. (2.31 million p.c.) as against 1.2 million p.c. price rise in September 2008—a record after 1923. It is an unbelievable rate. In May 2008, the cost of price of a toilet paper itself and not the costs of the roll of the toilet paper came to 417 Zimbabwean dollars.

Anyway, people are harassed ultimately by the high rate 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:

• Essay on the Causes of Inflation (473 Words)
• Cost-Push Inflation and Demand-Pull or Mixed Inflation
• Demand Pull Inflation and Cost Push Inflation | Money
• Essay on Inflation: Meaning, Measurement and Causes

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 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 it suppresses 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 , Growth, Marketing & Sales , Industrials & Electronics , Operations , and Strategy & Corporate Finance  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.

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• “ Economic conditions outlook during turbulent times, December 2023 ,” December 20, 2023
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• “ 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 Goedhardt 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, André 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.

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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

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Essay on Inflation

Inflation is a term that resonates through the corridors of our daily lives, affecting decisions made by individuals, businesses, and governments alike. It refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks attempt to limit inflation, and avoid deflation, to keep the economy running smoothly. This essay delves into the causes of inflation, its various effects on the economy and individuals, and the strategies employed to manage it, aiming to provide a comprehensive understanding suitable for a student participating in an essay writing competition.

The Causes of Inflation

Inflation is primarily caused by two factors: demand-pull and cost-push inflation. Demand-pull inflation occurs when demand for goods and services exceeds supply, causing prices to rise. This can happen due to increased consumer spending, government expenditure, or investment. Cost-push inflation, on the other hand, happens when the cost of production increases, leading producers to raise prices to maintain their profit margins. This increase in production costs can be due to rising wages, increased taxes, or higher prices for raw materials.

• Demand-pull inflation occurs when the overall demand for goods and services in an economy exceeds its supply. This excess demand leads to rising prices as businesses raise prices to capitalize on increased consumer demand.
• Factors contributing to demand-pull inflation include robust consumer spending, increased government spending, low-interest rates, and high levels of investment.
• Cost-push inflation is driven by rising production costs, which are then passed on to consumers in the form of higher prices. These rising costs can result from various factors, such as increased wages, higher energy prices, or supply chain disruptions.
• For example, if oil prices spike, it can lead to increased transportation costs, which may cause businesses to raise prices on their products.
• Built-in inflation, also known as the wage-price spiral, occurs when workers demand higher wages to keep up with rising prices. When businesses pay higher wages, they often pass those costs on to consumers, causing prices to rise further. This cycle can continue, perpetuating inflation.
• Expectations of future inflation can also contribute to built-in inflation, as people adjust their behavior and spending patterns in anticipation of rising prices.
• The policies of central banks, such as the Federal Reserve in the United States, can influence inflation. When central banks implement loose monetary policies, such as low-interest rates and quantitative easing, it can increase the money supply and potentially lead to demand-pull inflation.
• Central banks can also use tight monetary policies, such as raising interest rates, to combat inflation and reduce spending.
• Government fiscal policies, including changes in taxation and government spending, can affect inflation. An increase in government spending without corresponding revenue sources can stimulate demand and contribute to inflation.
• Tax cuts can also increase disposable income, leading to higher consumer spending and potential demand-pull inflation.
• Exchange rate fluctuations can impact inflation by influencing the prices of imported goods. A depreciating domestic currency can make imports more expensive, contributing to cost-push inflation.
• Conversely, a strengthening currency can lower import prices and help reduce inflation.
• Unforeseen events, such as natural disasters, geopolitical tensions, or disruptions in the supply chain, can cause sudden supply shortages or surpluses. These shocks can result in sharp price movements and contribute to inflation.
• For instance, a severe drought can reduce agricultural output, leading to higher food prices.
• Global economic conditions and trends, such as changes in international commodity prices or global economic growth, can influence inflation in individual countries.
• Economic policies in major trading partners can also have spill-over effects on domestic inflation.

The Effects of Inflation

Inflation impacts various facets of the economy and society. Moderate inflation is a sign of a growing economy, but high inflation can have detrimental effects.

Economic Effects

1. Reduced Purchasing Power: Inflation erodes the purchasing power of money, meaning consumers can buy less with the same amount of money. This reduction can impact living standards and consumer spending.

2. Income Redistribution: Inflation can act as a regressive tax, hitting harder on low-income families. Fixed-income recipients, such as pensioners, find their incomes do not stretch as far, while borrowers may benefit from repaying loans with money that is worth less.

3. Investment Uncertainty: High inflation can lead to uncertainty in the investment market. Investors become wary of long-term investments due to the unpredictability of future costs and returns.

Social Effects

1. Cost of Living: As the cost of goods and services increases, individuals may struggle to afford basic necessities, leading to a lower quality of life.

2. Wage-Price Spiral: Continuous inflation can lead to a wage-price spiral, where workers demand higher wages to keep up with rising prices, which in turn causes prices to rise further.

3. Access to Education and Healthcare: Rising costs can make education and healthcare less accessible to the general population, affecting long-term social and economic development.

Managing Inflation

Governments and central banks use various tools to manage inflation, aiming to maintain it at a level that promotes economic stability and growth.

Monetary Policy

The most common tool for managing inflation is monetary policy, which involves regulating the money supply and interest rates. Central banks can increase interest rates to reduce spending and borrowing, thereby slowing down the economy and reducing inflation. Conversely, lowering interest rates can stimulate spending and investment, increasing demand and potentially causing inflation.

Fiscal Policy

Governments can also use fiscal policy to control inflation by adjusting spending and taxation. Reducing government spending or increasing taxes can decrease the overall demand in the economy, lowering inflation. However, these measures can be unpopular politically as they may lead to reduced public services and higher taxes.

Supply-Side Policies

Improving efficiency and increasing supply can also combat inflation. This can be achieved through investment in technology, deregulation, and policies aimed at increasing productivity. By increasing the supply of goods and services, prices can stabilize or even decrease.

In conclusion, Inflation is a complex phenomenon with wide-ranging effects on the economy and society. Understanding its causes and impacts is crucial for effective management and policy-making. While moderate inflation is a sign of a healthy economy, unchecked inflation can lead to significant economic and social challenges. Through a combination of monetary, fiscal, and supply-side policies, governments and central banks strive to balance inflation to ensure economic stability and growth. As students delve into the intricacies of inflation, they gain insight into the delicate balance required to manage an economy, preparing them for informed citizenship and, possibly, roles in shaping economic policy in the future.

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Economic essays on inflation

• Definition – Inflation – Inflation is a sustained rise in the cost of living and average price level.
• Causes Inflation – Inflation is caused by excess demand in the economy, a rise in costs of production, rapid growth in the money supply.

• Costs of Inflation – Inflation causes decline in value of savings, uncertainty, confusion and can lead to lower investment.

• Problems measuring inflation – why it can be hard to measure inflation with changing goods.
• Different types of inflation – cost-push inflation, demand-pull inflation, wage-price spiral,
• How to solve inflation . Policies to reduce inflation, including monetary policy, fiscal policy and supply-side policies.
• Trade off between inflation and unemployment . Is there a trade-off between the two, as Phillips Curve suggests?
• The relationship between inflation and the exchange rate – Why high inflation can lead to a depreciation in the exchange rate.
• What should the inflation target be? – Why do government typically target inflation of 2%
• Deflation – why falling prices can lead to negative economic growth.
• Monetarist Theory – Monetarist theory of inflation emphasises the role of the money supply.
• Criticisms of Monetarism – A look at whether the monetarist theory holds up to real-world scenarios.
• Money Supply   – What the money supply is.
• Can we have economic growth without inflation?
• Predicting inflation
• Link between inflation and interest rates
• Should low inflation be the primary macroeconomic objective?

See also notes on Unemployment

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

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What Is Inflation?

Understanding inflation, types of price indexes.

• Pros and Cons

Controlling Inflation

• Inflation, Deflation, and Disinflation

Hedging Against Inflation

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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 is a measure of how quickly prices are increasing over time. In other words, inflation measures how quickly money loses its purchasing power .

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 March 2024 on an unadjusted basis. Prices rose 0.4% on a seasonally adjusted basis in March 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

Causes of Inflation

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.

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.

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 worth be 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.

Examples of Inflation

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."

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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 ."

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• Inflation: What It Is, How It Can Be Controlled, and Extreme Examples 1 of 41
• 10 Common Effects of Inflation 2 of 41
• How to Profit From Inflation 3 of 41
• When Is Inflation Good for the Economy? 4 of 41
• History of the Cost of Living 5 of 41
• Why Are P/E Ratios Higher When Inflation Is Low? 6 of 41
• What Causes Inflation? How It's Measured and How to Protect Against It 7 of 41
• Understand the Different Types of Inflation 8 of 41
• Wage Push Inflation: Definition, Causes, and Examples 9 of 41
• Cost-Push Inflation: When It Occurs, Definition, and Causes 10 of 41
• Cost-Push Inflation vs. Demand-Pull Inflation: What's the Difference? 11 of 41
• Inflation vs. Stagflation: What's the Difference? 12 of 41
• What Is the Relationship Between Inflation and Interest Rates? 13 of 41
• Inflation's Impact on Stock Returns 14 of 41
• How Does Inflation Affect Fixed-Income Investments? 15 of 41
• How Inflation Affects Your Cost of Living 16 of 41
• How Inflation Impacts Your Savings 17 of 41
• How Inflation Impacts Your Retirement Income 18 of 41
• What Impact Does Inflation Have on a Dollar's Value Over Time? 19 of 41
• Inflation and Economic Recovery 20 of 41
• What Is Hyperinflation? Causes, Effects, Examples, and How to Prepare 21 of 41
• Why Didn't Quantitative Easing Lead to Hyperinflation? 22 of 41
• Worst Cases of Hyperinflation in History 23 of 41
• How the Great Inflation of the 1970s Happened 24 of 41
• What Is Stagflation, What Causes It, and Why Is It Bad? 25 of 41
• Understanding Purchasing Power and the Consumer Price Index 26 of 41
• Consumer Price Index (CPI): What It Is and How It's Used 27 of 41
• Why Is the Consumer Price Index Controversial? 28 of 41
• Core Inflation: What It Is and Why It's Important 29 of 41
• What Is Headline Inflation (Reported in Consumer Price Index)? 30 of 41
• What Is the GDP Price Deflator and Its Formula? 31 of 41
• Indexation Explained: Meaning and Examples 32 of 41
• Inflation Accounting: Definition, Methods, Pros & Cons 33 of 41
• Inflation-Adjusted Return: Definition, Formula, and Example 34 of 41
• What Is Inflation Targeting, and How Does It Work? 35 of 41
• Real Economic Growth Rate: Definition, Calculation, and Uses 36 of 41
• Real Gross Domestic Product (Real GDP): How to Calculate It, vs. Nominal 37 of 41
• Real Income, Inflation, and the Real Wages Formula 38 of 41
• Real Interest Rate: Definition, Formula, and Example 39 of 41
• Real Rate of Return: Definition, How It's Used, and Example 40 of 41
• Wage-Price Spiral: What It Is and How It’s Controlled 41 of 41

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How to Write About Inflation

Daniella flores.

• March 8, 2022
• Blogging and Podcasting

Ugh, inflation.

If you’re anything like me, you cringe at the sight of the word. To me, it means things are getting more expensive and who loves that? No one, especially not my budget .

It’s 2022, we’re entering the 3rd year of a global pandemic, and inflation is the highest since 1982 according to Trading Economics .

You can watch all the news channels, read all the financial news articles, or even talk to your angry uncle about how inflation is out of control because “Uncle Sam is screwing us again”, but after all of that you are left pretty clueless to what it even is and how it might be affecting your own life.

As we dive into how to write about inflation, let’s get clear on what exactly inflation is, what causes it, how it affects you, and who is profiting from all of it.

What is Inflation?

Inflation is a measure of the rate of rising prices of the goods and services in an economy. When prices rise, the purchasing power of your money decreases.

The purchasing power of our dollar goes down because we have to use more dollars to meet those rising prices. Ultimately, the less we are able to purchase with our dollars the more inflation rises.

What Causes Inflation?

There are several factors that can drive prices upward in an economy. Typically, inflation can result from an increase in production costs or an increase in demand for products and services.

Some of the various factors that drive inflation include:

• Cost-push inflation: When production costs increase due to increase in raw materials or wages, prices for those products or services increase.
• Demand-pull inflation: When there is a strong consumer demand for a product or service, the prices will increase.
• The housing market: When the demand for housing increases, home prices will rise.
• Expansionary fiscal policy: Fiscal policy is how the government adjusts its spending and tax rates to monitor and influence the economy.

How to Write About Inflation?

When writing about inflation, you have to know your audience and who you’re talking to. Inflation has several nuances of impact depending on the sector and personal experience.

It’s best to simplify it down as much as you can when talking to your audience and do so without bias.

To break inflation down in terms that a 5 year old can understand, I spoke with someone who is much more qualified and experienced on the subject, Jonathan Thomas M.B.A., who is a Financial Coach and the host of Money Talks , a YouTube channel that helps folks to turn their financial goals into day to day decisions.

Jonathan simplifies inflation as “Inflation means everything costs more to produce. When I was a kid a cheeseburger cost me 50 cents at McDonald’s. Every year the cost rose on food like bread, meat, cheese, etc. Because the cost to make a cheeseburger went up, McDonald’s had to raise the price. Now a cheeseburger costs $1.59.”

Give Examples in Your Writing, Especially for Those More Complicated Experiences of Inflation

When talking about inflation, it’s best to pair examples and analogies like Jonathan did to help the reader better understand it, how it affects them, and how it might affect those around them.

For instance, an example from my own life is the experience of the rise of housing costs from one end of the country to the other during the height of Covid-19 in 2020 which could illustrate a more complex form of inflation.

My wife and I moved across the country in December 2020 after we both became location independent, meaning we could work from anywhere. We weren’t the only people that did this in the last couple of years.

In fact, 15.9 million people had already moved by the time we did and their decision to move was influenced by the pandemic in one way or another. Some of those people had to move because of rising rent costs and other financial reasons like job loss. Others feared getting Covid-19 where they lived or wanted to move to be closer to family.

This drove the price of housing up and fast.

We moved from St. Louis, Missouri where the housing prices are below the national average, to a small town in Washington state where the housing is much higher. We went from a $100k house to almost a $300k house.

Our real estate broker explained that because so many people in the larger cities were moving to rural areas like the one we were moving to, this sort of mass migration drove the demand for housing up.

At the same time with increasing demand, there was a smaller inventory of affordable housing available and few new building projects for that same category of affordable housing in the area. This created a seller’s market with bidding wars on new available listings sometimes starting as soon as the house was listed.

Folks were buying houses without ever looking at them, waiving inspections, and due to bidding wars would offer sometimes as much as $50k over asking price for the same house you’d find in St. Louis, MO for $200k less.

Jonathan explains that a part of this equation is “Demand increased for real estate so the cost of lumber increased as there wasn’t enough available for everyone to keep building.”

The other part includes the Federal Reserve’s influence on interest rates that kept mortgage rates low during this time as well, surging that housing demand even higher as it meant American’s could secure mortgages at the lowest interest rate in history in December 2020 – 2.68%.

Framing Inflation as Good or Bad

Inflation can be both good and bad. However, how you write about inflation must take into account your reader’s experience with their current financial situation and how inflation might be impacting that experience.

For instance, if you say inflation is good because it means people can make more money and their assets can build wealth quicker, your reader may not resonate with that same perspective.

If your reader had a house in Washington at the height of the seller’s market last year, they would’ve seen that inflation as a good thing for them because it increased the value of their own house. Some folks could sell their house for as much as $500,000 more than what they bought it for.

Then there were folks on the other side of that fence where they were ready to purchase their first home that year, and found nothing they could afford. Or they lost a job and couldn’t afford rent anymore. So, they had to leave their home to move somewhere cheaper to turn around and see the landlord listing their home for half the price after so they could fill the unit with a tenant.

It’s also because of the rate of inflation since then that folks are seeing those same discounted rents, now going back up.

Inflation can be good and bad for everyone. Be mindful of how you frame it to your audience.

Conclusion: How Well Do You Know Your Audience?

When you discuss any sort of financial topic, it is crucial that you know exactly who you’re talking to. People have charged reactions to reading financial content because of how personal and political money is. Charge them up in a positive way, not a negative one.

Start with a simple audience persona which you can use a template like the one found here . Ask yourself what are the most common problems that your audience might have with inflation and then speak to those problems when covering the topic.

If you know your audience, writing about inflation is going to be a breeze.

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The Relationship Between Money Supply and Inflation Essay

Introduction, money supply, the relationship between money supply and inflation, reference list.

The current globalisation rate has led to many changes and effects on the value of most resources and especially the financial resources. The world’s population is increasing at a fast rate while on the other hand resources are being depleted without being replenished thus causing scarcity.

As a result, economic crisis have occurred which have as well affected the living standards of a better part of the world’s population (Hardwick, 2002, p.176). Among the common effects are the high inflation and the amount of money supplied.

Economists have however established the rate of Inflation and the money supply of a nation are correlated with one leading to another. This paper is therefore an analysis of the relationship between the inflation rate and money supply.

Inflation is said to be the increase in the prices of commodities and services in a given economy. This makes the people buy less since their purchasing power goes down as a result of the lower value of the currency. Inflation rates of most countries keep fluctuating but their central banks try to keep the rates at a range of about two to three percent.

The consumer price index is what is used to measure the inflation rates of an economy. It has been theoretically argued that inflation is caused by an increase in money supply in the economy (Hall and Taylor, 1997, p.637).

Money supply is an economic term which refers to the amount of money circulating in an economy. The central bank is bestowed with controlling the money supply of a country through regulation of the circulation (Williams, 2008, p.1). Money supply can be measured by looking at the value of currency, bills, credit, loans as well as other liquid instruments in an economy.

Economists have suggested that there is a high degree of correlation between the inflation rate and money supply in an economy. To begin with is the fact that when the money supply is high the demand for money goes down.

This is because people are able to afford even the high priced commodities and services that they could not have initially afforded (Mishkin, 1995, p.89). It can thus be depicted that an upward supply of money in the economy results to inflation according to the graph shown below.

A look at the graph at first glance does not show any instances of correlation however after the introduction of a time lag in which the two occur a situation of relationship is then established. This time lag is the difference in time between changes in the money supply and the changes in the inflation rates. Thus, the relationship occurs after a period of time as it can be depicted on the graph in the years 1990, 1996, 2000 and 2001 among others.

This can be practically explained in a situation whereby the people of a given small town are given the opportunity to raise a higher income than they would have before in a month. They would thus shift from using gasoline to gas as their source of fuel which costs higher.

This is because in real sense, the gas will cost proportionally lower than the price they were paying for gasoline before the increase in income. As a result, the market will bear high prices for commodities and services leading to inflation which has come about due to increased money supply (Williams, 2008, p.1).

The relationship between inflation rates and money supply can be differently explained using different economic theories. The Monetary theory explains that money supply is the most significant factor that leads to incidences of inflation in an economy.

Quoting the words of a renowned monetarist by the name Milton Friedman, he said, “Inflation is always and everywhere a monetary phenomenon” (Williams, 2008, p.1). Thus according to empirical studies conducted by most historical monetarists, it can be asserted that inflation is a monetary phenomenon. This is in accordance to the equation;

• M is the nominal value of money (money supply)
• V is the money velocity
• P is the price level
• Q is the real value index (Transactions)

From the above equation, monetarists argue that the money velocity is not affected by changes in the money supply in the long-run (Mankiw, 2002, p.153). Therefore the output is highly dependent on the productivity of the economy.

Working with these assumptions it can be said that changes in price are dependent on the changes in the quantity of money in the economy thus the money supply. The chart below derived from the above equation shows the differences in inflation reflected by CPI and the money supply reflected as M2.

Fig. A chart showing the relationship between inflation and money supply (Burda and Wyplosz, 1997, p. 267)

According to the Keynesian theory, there still exists a relationship between money supply and inflation. However, they argue that money supply is not the only big factor that causes inflation as there are also other contributing factors.

The Keynesians emphasize that aggregate demand is the main reason behind inflation and thus regulating the aggregate demands in periods of recessions and economic expansions helps stabilize the inflation rates as well. Nevertheless, the relationship comes about as aggregate demand is effectively controlled using economic instruments such as monetary policy and fiscal policy (Burda and Wyplosz, 1997, p. 275)

From the above discussion, it can be concluded that there is indeed a great correlation between money supply and inflation rates of an economy. It is evidenced that changing the money supply through the central banks leads to a control of the inflationary situations in the same economy.

For instance, a country with high inflation rates and willing to lower them, they will do this through the operations of the central bank whereby the lending rates and the interest rates will be increased to reduce the amount f money leaving the bank (Baumol and Blinder, 2006, p.109).

As a matter of fact, people will rush to deposit the cash they have so that it can earn as much interest as possible. This will in turn reduce the amount of money circulating in the region hence reducing the inflation rates as well.

In a situation of deflation the vice versa will be applied where the central bank will reduce the lending rates and interest rates so as to enable flow of money into the economy (Baumol and Blinder, 2006, p.109). The control between money supply and inflation rates is thus operated using the federal banking system of the central bank of the region.

Baumol, W. and Blinder, A. (2006). Macroeconomics: Principles and Policy , Tenth edition. Thomson South-Western.

Burda, M. and Wyplosz, C. (1997). Macroeconomics: a European text . Oxford [Oxfordshire]: Oxford University Press.

Hall, R. and Taylor, J. (1993). Macroeconomics . New York: W.W. Norton.

Hardwick, P. (2002). Introduction to modern economics, prentice hall publishers, New York.

Mankiw, N. (2002). Macroeconomics (5th Ed.). Worth.

McMahon, T. (2009). Money Supply and Inflation. Web.

Mishkin, F. (1995). The Economics of Money, Banking, and Financial Markets , New York, Harper Collins.

Williams, J. (2008). Money Supply Special Report. Web.

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IvyPanda. (2022, December 9). The Relationship Between Money Supply and Inflation. https://ivypanda.com/essays/the-relationship-between-money-supply-and-inflation-essay/

"The Relationship Between Money Supply and Inflation." IvyPanda , 9 Dec. 2022, ivypanda.com/essays/the-relationship-between-money-supply-and-inflation-essay/.

IvyPanda . (2022) 'The Relationship Between Money Supply and Inflation'. 9 December.

IvyPanda . 2022. "The Relationship Between Money Supply and Inflation." December 9, 2022. https://ivypanda.com/essays/the-relationship-between-money-supply-and-inflation-essay/.

1. IvyPanda . "The Relationship Between Money Supply and Inflation." December 9, 2022. https://ivypanda.com/essays/the-relationship-between-money-supply-and-inflation-essay/.

Bibliography

IvyPanda . "The Relationship Between Money Supply and Inflation." December 9, 2022. https://ivypanda.com/essays/the-relationship-between-money-supply-and-inflation-essay/.

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Essay on Inflation In Philippines

Students are often asked to write an essay on Inflation In Philippines in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Inflation In Philippines

What is inflation.

Inflation means the prices of things we buy are going up. In the Philippines, when prices rise, it becomes harder for people to afford food, clothes, and other items. This can happen when there’s too much money to spend but not enough goods, or when the cost to make products goes higher.

Inflation in the Philippines

The Philippines often experiences inflation. This can be due to natural disasters affecting crops, changes in global oil prices, or government actions. When inflation occurs, Filipino families might struggle to buy what they need, which can be tough for everyone.

Effects on Daily Life

Because of inflation, families in the Philippines might have to change how they spend money. They may buy less food or cheaper items to save money. Sometimes, even going to school or getting healthcare can become more expensive, making life challenging for many people.

250 Words Essay on Inflation In Philippines

Understanding inflation in the philippines.

Inflation means the increase in prices of things we buy, like food, clothes, and toys. In the Philippines, just like in other countries, prices can go up over time. This can make life hard for families, especially if they don’t have a lot of money.

Causes of Inflation

In the Philippines, inflation can happen for many reasons. Sometimes, if there’s a problem with growing food or if there’s a big storm, there might not be enough of it, and this can make prices go up. Also, if the money in the Philippines becomes less valuable compared to other countries’ money, things that come from other countries can become more expensive.

Effects of Inflation

When prices go up, it’s tough for people. They might not be able to buy as much with their money, and this can be stressful. Parents might have to work more to earn more money, and sometimes, kids might not get new toys or clothes as often.

What the Government Does

The government in the Philippines tries to control inflation. They can change how much money is in the economy or make rules about prices to help keep them from going up too fast. They do this because they want to make sure that people can afford what they need.

Inflation in the Philippines is a challenge that affects everyone. It’s important to understand why it happens and how it changes the way people live. While it can be tough when prices go up, the government works to manage inflation for the good of the country.

500 Words Essay on Inflation In Philippines

Inflation is when the prices of things we buy go up. Imagine you could buy a toy car for one peso last year, but this year the same car costs two pesos. That’s inflation: the money you have buys less than before. This can happen with toys, food, clothes, and almost everything. In the Philippines, like in many countries, inflation affects how people live because they need more money to buy the same things.

Causes of Inflation in the Philippines

In the Philippines, inflation happens for a few reasons. Sometimes, when there are not enough goods like rice or vegetables, prices go up because many people want these items but there aren’t enough for everyone. This is called “demand-pull inflation.” Another reason is “cost-push inflation,” which is when the cost to make products goes up. For example, if the price of gas increases, it costs more to deliver goods to stores, so the prices of these goods go up.

Also, when the money value in the Philippines goes down compared to other countries’ money, things we buy from other countries become more expensive. This is known as “imported inflation.”

Effects of Inflation on People

Inflation can make life hard for families. Parents have to spend more money on the same things, so they might have less money left for saving or for fun activities. Kids might notice that their allowance doesn’t buy as much candy or toys as it used to. If inflation is high, people might worry about prices going up even more and rush to buy things, which can make inflation worse.

How the Government Handles Inflation

The government of the Philippines tries to control inflation to make sure prices don’t rise too fast. The Central Bank of the Philippines can change interest rates, which is like changing the cost of borrowing money. If it’s more expensive to borrow money, people and businesses might spend less, and this can help slow down inflation.

The government can also use policies to help make sure there is enough supply of goods. For example, they can encourage farmers to grow more rice or make it easier for stores to get products from other countries when there’s not enough supply in the Philippines.

What Can People Do?

People can also do things to handle inflation. Families can plan their spending and look for better prices before buying something. It’s important to learn about money and how to use it wisely, especially when prices are going up.

Inflation in the Philippines is when prices rise and money buys less. It can be caused by not enough goods, higher costs to make products, or the country’s money value changing. Inflation affects how people live, but the government and people can take steps to manage it. By understanding what inflation is and how it works, even school students can be better prepared to deal with it in their daily lives.

That’s it! I hope the essay helped you.

If you’re looking for more, here are essays on other interesting topics:

• Essay on Cold War
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• Essay on Inequality In Society

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Essay on Inflation in Pakistan for Students

by Pakiology | Mar 22, 2024 | Essay | 0 comments

In this essay on inflation in Pakistan, we will look at the causes, effects, and solutions to this issue that has been affecting the country for decades. The term ‘inflation’ refers to a sustained rise in the prices of goods and services in an economy. In Pakistan, inflation has been a major concern since the late 1990s, with the Consumer Price Index (CPI) reaching a peak in 2023. We will explore the various factors that have contributed to inflation in Pakistan, its economic effects, and what can be done to address the issue.

Page Contents

Essay on Inflation Outlines

Causes of inflation in pakistan, effects of inflation, solution to control inflation.

• Introduction

Inflation in Pakistan is caused by several factors, which can be divided into two main categories: domestic and external. The main domestic causes of inflation are an increase in money supply, an increase in government spending, an increase in indirect taxes, and a decrease in economic growth.

The most significant contributor to inflation in Pakistan is an increase in the money supply. When there is too much money chasing after too few goods, prices rise, creating a situation known as demand-pull inflation. An increase in the money supply can be caused by the central bank printing more money or by the government borrowing more money from the public.

In addition, higher government spending can lead to inflation. This occurs when the government prints more money to finance its expenditure or borrows from the public and transfers the cost of this additional spending to businesses and consumers. This leads to higher prices for goods and services. Indirect taxes are another major factor that contributes to inflation in Pakistan. When indirect taxes are increased, prices of goods and services also increase, leading to an overall rise in prices.

Finally, low economic growth can also cause inflation in Pakistan. A weak economy reduces people’s purchasing power, forcing them to buy less, which reduces demand and leads to lower prices. However, when economic growth stalls, businesses are unable to sell their products at the same price as before, leading to a rise in prices.

Overall, inflation in Pakistan is caused by a combination of domestic and external factors. These include an increase in money supply, higher government spending, increases in indirect taxes, and a decrease in economic growth.

The effects of inflation on the economy can be both positive and negative. Inflation erodes the purchasing power of money, meaning that each unit of currency is worth less than it was before. This means that, as the cost of living increases, people can purchase fewer goods and services for the same amount of money. As a result, their standard of living decreases.

Inflation also reduces the real return on investments and savings, which can have a detrimental effect on economic growth. When inflation is high, people prefer to save their money rather than invest in a business or other activities. This reduces the availability of capital and results in slower economic growth.

In addition to decreasing standards of living, inflation can lead to unemployment if companies are not able to increase wages at the same rate as prices rise. This can lead to an increase in poverty, as people struggle to afford necessities. Furthermore, when prices rise faster than wages, it puts pressure on government budgets and can increase public debt.

Inflation can also cause the value of the local currency to depreciate against foreign currencies. This has a direct impact on the cost of imports and makes domestic goods less competitive in international markets. It can also have an indirect impact on exports, as it reduces the competitiveness of local producers in foreign markets.

Inflation is a serious issue in Pakistan, and it needs to be addressed to improve the country’s economic conditions. The following are some of the measures that can be taken to control inflation in Pakistan:

1. Fiscal policy: A strong fiscal policy is necessary for controlling inflation. The government should increase its revenue by implementing taxes on the wealthy and reducing public spending. This will help reduce budget deficits, which will result in lower inflation.

2. Monetary policy: The State Bank of Pakistan should adopt a tighter monetary policy to control inflation. It should raise interest rates so that investors have an incentive to save rather than spend, thus curbing demand-pull inflation.

3. Supply-side measures: There should be an increase in the production of essential commodities and products to meet the demand of consumers. This will help reduce prices and inflation in the long run.

4. Subsidies: The government should provide subsidies to those who are suffering due to the high prices of essential items. This will help them cope with the rising cost of living and ensure that they have access to essential goods and services.

5. Stabilizing exchange rate: A stable exchange rate between foreign currencies and the rupee is necessary for controlling inflation. The State Bank of Pakistan should strive to keep the rupee’s value stable by using currency swaps and other methods.

These measures can go a long way in controlling inflation in Pakistan. By taking these measures, the government can help improve the country’s economic condition and create an environment conducive to investment and growth.

What is inflation in simple words?

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

What are the 4 main causes of inflation?

The 4 main causes of inflation are: Demand-pull inflation: when there is an increase in demand for goods and services that outstrip the economy’s ability to produce them. Cost-push inflation: when the cost of production increases, causing companies to raise prices to maintain their profit margins. Built-in inflation: when businesses expect prices to rise and build that expectation into their prices, causing a self-fulfilling cycle of inflation. Imported inflation: when the cost of imported goods increases, leading to higher prices for consumers.

What are the 5 main causes of inflation?

The 4 main causes of inflation are: 1. Demand-pull inflation 2. Cost-push inflation 3. Built-in inflation 4. Imported inflation 5. Monetary inflation

What is inflation introduction?

Inflation is a phenomenon that has been observed throughout history. It refers to the sustained increase in the general price level of goods and services in an economy over a period of time.

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NPR suspends editor who criticized his employer for what he calls an unquestioned liberal worldview

FILE - The headquarters for National Public Radio (NPR) stands on North Capitol Street, April 15, 2013, in Washington. (AP Photo/Charles Dharapak, File)

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NEW YORK (AP) — National Public Radio has suspended a veteran editor who wrote an outside essay criticizing his employer for, in his view, journalism that reflects a liberal viewpoint with little tolerance for contrary opinions.

Uri Berliner, a senior editor on NPR’s business desk, was suspended five days without pay, according to an article posted Tuesday by NPR’s media correspondent, David Folkenflik. He wrote that Berliner was told he violated the company’s policy that it must approve work done for outside news organizations.

Berliner told NPR that he was not appealing the suspension. An NPR spokeswoman said the company would not comment on individual personnel matters.

He wrote his essay last week for The Free Press. Berliner wrote that NPR has always had a liberal bent, but for most of his 25-year tenure had an open-minded, curious culture.

“In recent years, however, that has changed,” he wrote. “Today, those who listen to NPR or read its coverage online find something different: the distilled worldview of a very small segment of the U.S. population.”

His commentary became an instant hit with outside conservative activists who have made similar criticisms of NPR. He specifically criticized his employer for its coverage of former President Donald Trump, of accusations against the president’s son, Hunter Biden, and of the COVID-19 pandemic.

Following publication, NPR’s top editor, Edith Chapin, said she strongly disagrees with Berliner’s conclusions and is proud to stand behind NPR’s work.

One of his NPR colleagues,“Morning Edition” co-host Steve Inskeep, wrote on Substack Tuesday that Berliner’s essay in The Free Press was filled with errors and assumptions.

“If Uri’s ‘larger point’ is that journalists should seek wider perspectives, and not just write stories that confirm their prior opinions, his article is useful as an example of what to avoid,” Inskeep wrote.

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Guest Essay

A Planetary Crisis Awaits the Next President

By Stephen Markley

Mr. Markley is a novelist.

In the 12 years it took me to write “The Deluge,” my novel of the climate crisis, I watched as chaotic weather, record temperatures and shocking political events outpaced my imagination. The book depicts the human tipping point, when the damage becomes irreversible and the foundations of our economy, our politics and our world begin to crack. The plot points I was concocting in 2010 would become a constant drumbeat of headlines into 2024.

Last year alone, the warning signs included soaring ocean temperatures, a record loss of Antarctic Sea ice and the highest global average temperature in recorded human history. Wildfires, droughts, floods and extreme weather of every variety have come to shock even the scientists who study the shocking stuff. This is not the history we want to be living through.

Yet here we are, and those gears of history will grind together again this year as another presidential election meets our permanent emergency. The stakes of the climate crisis render the cliché of “This is the most important election of our lifetimes” increasingly true because every four years those stakes climb precipitously alongside the toppling records of a radically new climatic regime.

The White House may soon be recaptured by Donald Trump, who called the climate crisis a “hoax” and even when backing off that assertion insisted , “I don’t know that it’s man-made.” He has demonstrated his thinking again and again, as when he told a scientist , “It’ll start getting cooler, you just watch.”

There has recently been a great deal of reporting on Project 2025 , a 900-plus-page road map for a second Trump administration assembled by the conservative Heritage Foundation. On climate, the report is succinct: “The Biden administration’s climate fanaticism will need a whole-of-government unwinding.”

The report recommends a repeal of the Infrastructure Investment and Jobs Act and Inflation Reduction Act, which would shred the tax credits that have led to hundreds of billions of dollars in investments in clean energy, the jump-starting of factory openings and the creation of jobs in virtually every corner of the country. Also lost will be investments in environmental justice, those measures that aim to reduce pollution in marginalized communities, provide affordable clean energy and create jobs in low-income neighborhoods. As for electric cars, which are critical to meeting the nation’s climate goals, the report recommends an end to all federal mandates and subsidies.

A second Trump administration would most likely grant permits for fossil fuel drilling and pipelines basically anywhere it has the say-so, scrap the methane fee on oil and gas producers and dismantle new pollution limits on cars, trucks and power plants. It would almost certainly revoke California’s waiver to approve higher standards under the Clean Air Act, seek repeal of the Antiquities Act used to protect endangered landscapes and attempt to gut the Endangered Species Act.

But perhaps most ominously, a Trump presidency would impede Americans’ ability to find out what’s being done to them. Project 2025 proposes dismantling and privatizing parts of the National Oceanic and Atmospheric Administration, a federal agency that studies and monitors the climate, and using an executive order to “reshape” the Global Change Research Program, apparently to muddy its assessments of the pace of climate change and the potential impact. We would walk into this new dark era with a blindfold on.

Mr. Trump is at heart a billionaire doing favors for other billionaires by cutting their taxes and eliminating or not enforcing rules that protect the rest of us from asthma and cancer. During his four years in office, he managed to dismantle or degrade over 100 environmental rules, which brought real-world death and suffering. The medical journal The Lancet estimated that in the year 2019 alone these policies led to 22,000 excess deaths from heart disease, asthma and lung cancer, among other causes.

For all the damage that was done, Mr. Trump and his administration fortunately proved incompetent at making the government fulfill his intentions. We shouldn’t delude ourselves with thinking that he and his allies will be caught as flatfooted as they were by their surprise victory in 2016. What Project 2025 demonstrates is that an enormous amount of thinking has gone in to how to destroy the government’s capacity to enforce environmental protections, conduct research or even assess the scientific reality of our situation. Of course, the worst-case scenario, a full or partial repeal of the Inflation Reduction Act, will depend on the composition of Congress.

My advice is to not tell yourself comforting bedtime stories about the political resiliency of that law when so many of its benefits lie in the years ahead.

One can hold up a document like Project 2025 and shout from the rooftops just how extreme it is. One can attempt to use numbers to describe this danger. But everyone will fall short — and, surely, I’ve fallen short — in describing just how frightening a second Trump presidency could actually be.

Do not limit your imagination.

Mr. Trump himself offered a glimpse in a recent meeting with oil and gas executives at Mar-a-Lago, where, The Washington Post reported, he said, “I hate wind.” He also told the executives that they should contribute to his campaign, that his policies would be much better for oil and gas than President Biden’s and that he’d do much of what they wanted “on Day 1.”

History will fork, and in a single day our window of opportunity for keeping the climate crisis from spiraling out of control could very well slam shut. Global emissions must peak this decade and begin a rapid decline for the world to have any chance of avoiding catastrophic warming. When I began writing my novel, we had something like 20 years to accomplish that task. After the election, we will have 62 months.

This makes the 2024 election a singular event in the climate crisis. Despite a number of headwinds, renewable energy capacity boomed last year, increasing 50 percent globally. According to the International Energy Agency, global renewable capacity is on course to be at two and a half times current levels by 2030, which means the world is edging closer to achieving a key climate target of tripling renewable energy capacity by 2030. The risks of the crisis are growing rapidly, but so is our capacity to confront this challenge at the speed and scale necessary. We must accelerate that momentum at all costs.

The other major candidate in the race, President Biden, has been a steadfast proponent of that acceleration.

I fully admit, Mr. Biden was not my first, nor even my seventh, choice in the 2020 Democratic primary. Yet when it came to the immense challenge of confronting this crisis, I am forever grateful that he proved me wrong, delivering a game-changing victory with the narrowest of congressional margins. Even as much of the rest of Mr. Biden’s ambitious policy agenda got hacked away in Congress, one thing remained: re-industrialization through clean energy investment.

This led to the passage of the Inflation Reduction Act, the most significant climate legislation the country has ever seen and a more important achievement than the Paris climate accord. In just two years, that bill has galvanized clean energy investment in the United States and set a pace for the rest of the world to compete in the growing clean energy economy. These investments are expected to create more than nine million jobs over the next decade. That growth in clean energy is not only breaking records by the year but also by the quarter, with the end of 2023 seeing a 40 percent increase in investments in clean energy and transportation over the last quarter of 2022.

As those industries of decarbonization spread to every state and to many congressional districts, people’s lives and livelihoods increasingly will become intertwined and invested in clean energy. When a Texas congressman can’t survive an election in a solidly Republican district without the backing of the wind and solar industries, when a battery factory in Hardin County, Ky ., is employing 5,000 people, when the fossil fuel economy is falling to the zero-carbon infrastructure we demand, that will change a politician’s calculations. The increasing political and economic clout of those clean energy industries will challenge the fossil fuel status quo. We are at the beginning of an absolute revolution of the American economy that will send manufacturing soaring and pollution plummeting.

Any climate hawk could try to encumber my argument with caveats, unaddressed pet issues and whatabouts, but as far as our shared atmosphere is concerned, there are only three pieces of relevant information: who Joe Biden is, who Donald Trump is, and the urgency of the crisis before us. While it’s true the United States continues to produce record amounts of fossil gas and near-record amounts of oil, these numbers reflect the all-of-the-above energy policies of the past 15 years. The Inflation Reduction Act and several critical regulations from Mr. Biden’s Environmental Protection Agency will drive the decarbonization that should put us within striking distance of our Paris climate agreement target by 2030, something that seemed unfathomable four years ago.

It’s worth dissecting how we achieved such progress. This stunning victory was made possible only by Stacey Abrams’s tenacious work in Georgia to flip two U.S. Senate seats in 2020, giving Mr. Biden a Senate majority on top of a House majority (which he narrowly lost in 2022).

Work is also underway on the state and local levels. In the last four years, Democrats have led efforts in Colorado, Illinois, Maryland, Massachusetts, Michigan and Washington to pass ambitious climate laws when voters demanded it. In major cities, we see aggressive action like Minneapolis’s Climate Equity Plan and Chicago’s push to end natural gas hookups for new construction.

From small cities like Athens, Ohio, which has a citywide carbon fee , to high school students campaigning for solar panels and electric buses, citizens can drive the movement to electrify everything and crush demand for fossil fuels. State public utility commissions remain ignored players with their hands on the controls of enormous amounts of carbon, ripe for campaigns to elect or appoint climate-oriented members. Whether we’re voting for president or state legislator or dogcatcher, we should vote for a dogcatcher who recognizes the imperative of the climate crisis.

The lesson being that the only thing that has worked, and must continue to work, is democracy at every level. None of us have the option to be cynical, to disdain electoral politics or to pretend we’re not making a distinct moral choice when voting for a third-party candidate or sitting out an election.

Right now, this means electing Democrats. The expiration of many of the Trump tax cuts in 2025 could create the leverage to push climate efforts even farther. We must look at this election and understand that it’s now or never — that we can create the opportunity for the United States to smash past its emission reduction goals and spur the rest of the world to follow. The climate movement can either fight like hell for Mr. Biden’s re-election or watch as Mr. Trump and his allies set fire to the planet.

Climate is not just another issue. I do not deny that we live in a complex and precarious world or that our consciences are torn by a web of domestic challenges and geopolitical upheavals. But we are in denial if we do not recognize that this is the crisis that will define this century, and if we fail, the entire human future. Our fossil fuel system is driving the planet to a set of conditions that humanity has never experienced, where even the imagination of novelists will fail us.

And yet the climate crisis is also the foundation on which we can build a more just, equitable and prosperous world. Every election is precious, every ballot we cast a moral record of what we did in this crucial historical moment. Do not sit on your hands, do not deny the stakes, do not waste that vote.

Stephen Markley is the author of “The Deluge” and “Ohio: A Novel.”

The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips . And here’s our email: [email protected] .

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