Inflation

In economics, inflation is an increase in the general level of prices of goods and services in an economy over a period of time. At one time, "inflation" referred to increases in the money supply in which case it was monetary inflation. Economic debates concerning the relationship between money supply and price levels have led to a change in its primary use. Today, inflation typically refers to "price inflation."

Inflation is frequently described as a decline in the real value of money. This means that the money has a decline of purchasing power. When the general price level rises, each unit of currency is capable of buying fewer goods and services. The chief measure of price inflation is the inflation rate. The inflation rate is the percentage change in a price index over time.

Inflation has a number of adverse effects on the economy. For example, uncertainty about the future rate of inflation has a tendency to discourage investment and saving. Inflation may widen a gap in income between those with fixed incomes and those with variable incomes. In cases of extremely high inflation, consumers may begin hoarding them out of concern that prices will increase in the future. This can lead to shortages of goods.

Economists usually agree that high rates of inflation and hyperinflation are caused by excessive growth of the money supply. Views on which factors determine moderate rates of inflation are more varied and diverse. Low or moderate inflation can be attributed to fluctuations in real demand for goods and services or changes in available supplies. This is particularly true during scarcity. The consensus is that a sustained period of inflation is caused when money supply increases faster than the growth in productivity in the economy.

The job of keeping the inflation rate low is typically given to monetary authorities who establish the monetary policy for a country. Today, this is generally a central bank that controls the size of the money supply through the setting of interest rates, open market operations, and through the setting of banking reserve requirements.

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