What is Inflation Today we will discuss Inflation in this blog and know how does inflation work and how many types of Inflation are there? So let us first know what is inflation?

What is inflation?

What is inflation: -Money demand and supply are out of balance, and changes in manufacturing and distribution costs or increases in excise taxes all contribute to inflation. The value of money decreases when the economy undergoes inflation, which is an increase in the price of goods and services. As a result, a given unit of currency now buys fewer products and services. The most affected parties are the customers. Consumers find it challenging to buy even the most basic necessities due to the high cost of daily goods. As a result, they are compelled to demand higher wages. As a result, the government works to control inflation.

Despite the negative effects, a healthy economy is characterized by a moderate amount of inflation. Because low inflation also means low-interest rates, an inflation rate of 2 or 3% is good for the economy because it encourages consumers to borrow more money and make more purchases. Therefore, governments and central banks always work to establish a limited level of inflation. After knowing what is inflation, now we will know how inflation works.

What is inflation and how does inflation work?

One measure of the economy’s rate of rising prices for goods and services is called inflation. Lastly, it reflects the declining purchasing power of the rupee. It is measured as a percentage. This quantitative economic analysis determines how quickly the prices of particular goods and services change over time. Inflation measures how much the average price has changed for a chosen basket of goods and services. A percentage is used to represent this. A rise in inflation indicates a decline in the purchasing power of the economy.

How many types of Inflation?

The main three types of inflation are as follows: –

  • Demand price inflation
  • Cost-push inflation
  • Built-in inflation

1. Demand Price Inflation

Demand Price inflation refers to the possibility of an increase in the price of products and services due to increased demand. If something is in short supply, people will usually pay more for it. Despite the fact that the airfare is much more expensive than usual, are you still paying for your plane tickets for the vacation? This is a classic example of demand Price inflation.

According to Blake, the U.S. is experiencing demand-pull inflation as a result of rising wages and the fact that people have a respectable amount in savings accounts, even though some customers are starting to empty those accounts.

2. cost-push inflation

When demand-pull inflation is at its peak, cost-push inflation often sets in. Businesses must adjust their pricing in response to rising raw material costs regardless of market demand. Blake claims that rising prices put businesses in a difficult position that producers must deal with. They have two options: either they keep their prices the same while accepting the increased costs, or they try to maintain the same profit margin.

3. underlying inflation

Employees may start requesting wage increases from their employers as demand-pull inflation and cost-push inflation occur. If employers do not keep their wages competitive, they face a labour shortage. Implicit inflation occurs when a company increases the wages or salaries of employees while trying to maintain profit margins by raising prices. If you find that your favourite coffee shop is raising prices as a result of the rising cost of coffee beans, you are now a victim of cost-push inflation. Additionally, if you buy that coffee despite the uncomfortable price, you are contributing to demand-pull inflation.

Which factors contribute the most to inflation?

Money Management: It establishes the money supply of the market. Inflation is caused by an excess supply of money. As a result, the value of the currency fell.

Fiscal Policy: It monitors the borrowing and spending of the economy. Higher borrowing (debt) leads to higher taxes and more money is printed to pay off the debt.

Cost-push inflation: An increase in the prices of goods and services as a result of an increase in the cost of production.

Exchange Rates: Foreign market risk is based on the value of the dollar. The rate of inflation is affected by the change in the exchange rate.

Demand-pull A mismatch between supply and demand (more demand) (less) causes prices to rise.

How is the inflation rate calculated?

The Consumer Price Index is used to calculate inflation. These procedures are used to calculate inflations for any product.

  • Finding out the rate of the product in the past.
  • Find out the current rate of the product.
  • Use the formula to calculate inflation. (Initial Consumer Price Index(CPI) – Final CPI/Initial CPI) *100 – In this case, the rate of the product is the CPI.
  • It indicates the percentage increase or decrease in the price of the product. It can be used to contrast the rate of inflation over time.

In this case, we used only one product to calculate inflations. However, the Ministry of Statistics uses a specified basket of goods and services to calculate inflations.

So today we remembered in this blog what is inflation, how does inflation work and about the main types of inflation.