Simply put, inflation is the increase in value over time in terms of available money. In familiar terms, in a certain amount of money, you can buy a lot less things today than ever before.
Inflation refers to the increase in the supply of money in an economy. Inflation occurs when the supply of money in the economy increases and the supply of goods and services remains unchanged. Because a lot of money is chases after limited products and services. This increases both the demand and the price level. Inflation in the classical and lexical sense also means a continuous increase in the price of all kinds of goods and services, which usually occurs due to the supply of surplus money, so that the value of money decreases.(blog writing fashion blogger gust post)
Usually, when the price of a commodity goes up, you need more money to buy that product with the local currency or you can buy less quantity if you buy the previous product with the same amount of currency. As a result of inflation, people’s purchasing power decreases.
According to economist Kemara, “inflation occurs when the country’s total money supply exceeds demand and commodity prices rise.”
In economics, inflation refers to an increase in the price of goods and services at a particular time. Usually, when the price of a commodity goes up, you need more money to buy that product with local currency or you can get less quantity if you buy the previous product with the same amount of currency.
The cause of inflation,
Inflation is mainly due to two reasons
When the demand for a product increases from the customers, the price increases due to “demand driven”. On the other hand, when the cost of supply of goods increases, the price increases.
1. Demand-driven inflation
Demand-driven inflation is the biggest reason for rising commodity prices. occurs when consumer demand for a product or service increases so much that it exceeds the supply level. Circumstances that cause demand-driven inflation –
When people have the extra money in their hands and as a result, their demand increases.
The higher the black market, the higher the price of things.
Government spending increases. As a result, the money comes into the pockets of the people.
Excessive economic subsidies increase the price of things.
If the government’s foreign trade debt increases.
Inflation means a lot of money is circulating in the market. In that case (in dollars) the value of money will decrease. Thus, demand-driven inflation occurs when consumers earn extra spendable money. When people have extra money to spend, then people want to buy more products and services and they have that ability.
2. Price-driven inflation
When there is a surplus demand for a product in the market and there is a huge shortage in the supply of the product, it creates an opportunity for the manufacturer to raise the price of the product or service and cause inflation. The main reason, however, is that when the price of the material used to make a thing increases, the price of the product as a whole increase.
To produce a product, four components are needed: Land, Labor, Capital, and Entrepreneur. This is what we call “factors of production”. The combined cost is called “Factor Cost”. As a result, if the price of something increases here, then the cost of production will also increase.
Besides, when the product comes into the market, the government imposes an indirect tax on it. Then the market price is fixed. This time, even if the government raises taxes, the price of things will go up. In addition, the rise in the price of mineral oil in the international market may be one of the reasons. Rising crude oil prices mean rising transport prices.
Ways to control inflation
The central bank and the government of a country come up with a plan to control inflation. A central bank’s plan is called monetary policy, while the government’s steps are called “fiscal policy”.
When inflation rises too much, that is, when a large amount of money usually enters the market, the Reserve Bank of that country raises the “bank rate”. As a result, other banks have had to raise interest rates on various loans they have to repay. At the same time, if the banks have to pay more interest, then the demand of the people towards taking loans also decreases. They also spend extra money to pay off previous debts. Overall, the purchasing power of the buyers is reduced.
Again, when the rate of inflation is negative, i.e. the supply of money in the market decreases, then the Reserve Bank lowers the “bank rate”. In addition, the government buys securities from the market and pays cash in return. On the other hand, the government also sets different policies to control inflation. For example, if the price of goods for indirect taxes continues to rise, the government can reduce the tax burden.