6 Thing To Know About Inflation

Inflation

1.) Know the Basics

Inflation is an increase in the price of a good or service. The value of a dollar does not stay the same. When inflation increases the purchasing power of a dollar goes down. After inflation a dollar is not worth as much as it was before.

2.) Causes of Inflation

There is no agreed upon reason for inflation but there are 2 main theories. Demand-pull inflation is caused by over producing money. Cost-pull inflation occurs when a company's cost goes up and they have to raise the price in order to maintain the profit margins.

3.) What Does This Mean

Inflation is a sign that an economy is growing. If there is a lack of inflation it could mean that the economy is weakening. The inflation rate is best at 2-3%. Anything greater can create a risk.

Review

So far we talked about inflation being an increase in the price of a good or service. Then, it is caused by demand-pull or cost pull. Last, it is a sign of the economies growth.

4.) CPI

CPI is a the number that compares the price of an item in one year to the price of an item in another year. It is only based on a selected group of products. It is measured by the average price for the years and then placed in order of their importance.

5.) Which is a Greater Risk

Although inflation can hurt some people, it can also help others. If there is a large amount of deflation it can affect the growth and economic stability.Deflation is a greater risk because it can weaken the economy.

6.) The Great Depression

During the Great Depression, economies around the world experienced deflation as production stopped and general prices levels declined 10% or more on an annualized basis. After the Great Recession of 2008, the United States just barely avoided a deflationary spiral. This was a good show of deflation and that it had a negative affect on the economy.