The Basics of Inflation

by Investing School on December 11, 2009

Inflation is something that affects just about every economy at some time or another. In economics, inflation happens when the cost of goods and services rise over a period of time. When this happens, each unit of the currency is not able to buy as much as it did prior to the rise in prices.

Inflation also happens when the value of the purchasing power of money erodes. You are able to measure the price inflation through the inflation rate. This is the annual percentage change in a price index. One index that is used commonly is the Consumer Price Index (CPI).

Inflation can be a good or bad thing for the economy. The negative effects of inflation can result in not having stability in the value of the currency. Inflation can also discourage consumers from investing and saving.

Extreme inflation can also result in having a shortage of goods. Some consumers may be nervous about the rate of inflation and as a result will begin to hoard goods out of concern that they will continue to rise in price.

Some of the positive effects of inflation can be a lessening of an economic recession. It can also help to reduce the real level of debt with is a relief to just about any consumer.

Most economists belief that one of the root causes of inflation or high rates of inflation come from an extreme production of the money supply. However, the opinions on low or moderate inflation vary.

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