In simple terms inflation is when more money is chasing fewer goods, thus causing prices of goods and services to go up.
A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.
Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages.
Sometimes, some companies benefit from inflation because a high demand means they can charge more for a product and consumers will still purchase. The rippling effect however is transferred to consumers as they would have to pay more for products and services.
Inflation can occur in nearly any product or service, including need-based expenses such as housing, food, medical care, and utilities, as well as want expenses, such as cosmetics, automobiles, and jewelry.
Inflation is a major concern for most economies because it makes money saved today less valuable tomorrow. Inflation erodes a consumer's purchasing power and can even interfere with the ability to retire.
There are two types of inflation, namely; Cost-Push and Demand-Pull inflation.
Cost-Push Inflation
Cost-Push inflation occurs when prices increase due to increases in production costs, such as raw materials and wages. The demand for goods is unchanged while the supply of goods declines due to the higher costs of production. As a result, the added costs of production are passed onto consumers in the form of higher prices for the finished goods.
For example, if the price of cement rises, construction companies will factor the rising cost into the prices of their finished products to cater for the price increase. The result is, higher prices for consumers without any change in demand for the products consumed.
Natural disasters can also drive prices higher. For example, if a flood destroys a crop such as corn, prices can rise across the economy since corn is used in many products.
However, as unemployment rates fall, the rate of inflation rises.
Demand-Pull inflation
This inflation can be caused by strong consumer demand for a product or service. When there's a surge in demand for a wide breadth of goods across an economy, their prices tend to increase. While this is not often a concern for short-term imbalances of supply and demand, sustained demand can resound in the economy and raise costs for other goods; the result is demand-pull inflation.
Consumer confidence tends to be high when unemployment is low, and wages are rising, leading to more spending.
As the demand for a particular good or service increases, the available supply decreases. When fewer items are available, consumers are willing to pay more to obtain the item, as outlined in the economic principle of supply and demand. The result is higher prices due to demand-pull inflation. Read Full Story
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