Inflation as the book defines it is “the rate of increase of the general level of prices”. This means that with the same amount of money you are unable to purchase the same amount of goods as before. The opposite of inflations is deflation the rate of decrease of the general level of prices. Inflation can be divided into cost-push inflation and demand-pull inflation.
Cost-push inflation is defined as “inflation whose initial cause is a rise in production costs”. This can be cause by increased wages leading to a wage-price spiral or a wage-wage spiral. The wage-price spiral is when price increases spark off a series of wage demands which lead to further price increase and so on. A wage-wage spiral is when one group of workers receive a wage increase, which sparks off a series of wage demands from other workers. Increased import prices, which can be the result of a rise in world prices for imported raw materials or a depreciation of currency, can also cause inflation. One of the remedies for cost-push inflation is introducing a prices and incomes policy to free price and wage increases. Other remedies are encouraging appreciation of the currency and reducing indirect taxation.
Demand-pull inflation occurs when there is to
It is agreed that inflation is not a desirable state but neither is deflation. If consumers wait for the decrease of prices the purchase are easily moved to the future. Therefore deflation also slows down economic growth.
The U.S. government plans to introduce an improved consumer price index in order to more accurately measure inflation. Many think that this is a complete waste of time. It is said that inflation is not about a general increase in prices but about the increase in the money supply. Hence whatever the improved index would measure has nothing to do with true inflation, which is always increases in the money supply. Consequently to find out the status of inflation there is no need for various sophisticated price indices all that is required is to pay attention to the money supply’s rate of growth.
Not every one suffers from the inflation. The governments will find out that people earn more and therefore pay more income tax. Another one who benefits is firms who are able to increase prices and profits before they pay out higher wages. Debtors are also among those who gain because they have the use of money now, when its purchasing power is greater. They also benefit from it because when inflation ate away the value of the currency the value of the debt decreased also. Before it was recommended that house or apartments be bought on debt because the inflation will decrease the value of the de
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