Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. It is an upward movement in the average level of prices.
“Inflation is inevitable like death” is the saying of one of the economists. It can also be defined as, “a state of disequilibrium between the purchasing power which is increasing and the output of goods and services which is not increasing to a corresponding rate.” But for a common man in the street it may mean’; “a process of hiking prices”. Inflation in essence implies, “too much money chasing too few goods”.
Inflation is a world-wide phenomenon. Throughout the history of mankind prices have been rising due to war, famine and natural calamities.
In Economics, inflation basically happens when too much money is chasing few goods. In other words, there is extra supply of money for purchasing of few goods (which are limited).
The government measures the rate of inflation with the Consumer Price Index. This index measures the costs of set items from month to month and year to year. Inflation generally takes place gradually over a few years, although it may increase suddenly after a recession or depression.
It can be difficult to prepare for inflation because the money you have saved and your investments no longer have the same spending power as they did before the inflation began. In the case of inflation, durable goods will increase in cost. One way to prepare for inflation is to store durable goods. You can trade these goods or just have them on hand so you do not need to use the savings you have accumulated until the inflation has ended.
There are different types of inflation based on various categories, the below graph depicts these different categories.
We will be covering each type in the coming days
Definitions of Inflation
According to Samuelson, Inflation denotes a rise in the general level of prices.
According to Pigou, Inflation exists when money income is expanding more than in proportion to increase in earning activity