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what is inflation

            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 too much money in respect to the amount of goods available because demand for current output exceeds supply. Reducing government spending and increasing income tax to reduce consumer spending can solve this type of inflation. Another remedy is reducing people's ability to borrow money by increasing interest rates and tightening credit regulations.
             Today the meaning of expectations of inflation is emphasized. If prices are expected to rise the salary demands are tailored in accordance with the expected inflation or the asking price of a house is set higher just in case. Inflation expectations can also cause inflation.
             Traditionally the savers are the ones that suffer the most from inflation.


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