Economy

Economic inflation and the possible benefits

inflation

The use and meaning of the word inflation usually are dependent on the context of use. Most people use the word to mean entirely different things, however, in an economic sense, the definition varies. For the business individual, traders, economists, and the ruling political class they argue that to have sustainable budgets and affordable consumptions to thrive, there must be a moderate level of inflation rates in an economy. This, however, is an assumption that vaguely does not factor in that for vital economic growth to take place higher capital expenditure must be facilitated to boost economic growth.

Therefore, inflation can be defined as the rate of unequal rise of commodity prices such as goods and services with a significant decline in purchasing power of the currency used within the same economy normally this forces a fall in currency worthwhile at the same time there is incremental buying price of commodities or services. The consequence to an economy is an immediate rise in fuel prices, higher pricing for consumer goods and services eventually cost of most things skyrocket even by 50% of the initial price. The overhead business operational cost increases making inputs expensive, the cumulative effect of this is the sudden price incremental. One, however, needs to understand that inflation is largely a function of demand as well as the supply of currency. This directly translates to an effect where production of more currency results in devaluation of the currency’s purchasing strength making the general prices to soar up in an economy affected by inflation.

The possible benefits of inflation

This could be a surprise but there are some benefits of inflation in an economy. Sometimes an economy may not be operating at maximum capacity resulting in underutilization of labor or economic resources. For such scenarios, in theoretical terms inflation may help cushion the economy by increasing production. Having more cash i.e. dollars in an economy means there is higher spending, the more the spending is, the more there is demand. The need to meet the more demand will result in the creation of more production to cater for the demand. Inflation at times has cushioned debt owed to lenders by either states or individuals who have borrowed money. For their debt repayments, they get to pay back the loans when the money has a lower value than at the time they were given the loans. The direct economic outcome is, therefore, more borrowing as well as lending is facilitated helping individuals secure loans and at same time lending institutions make money which results in increased spending. The biggest beneficiary of this phenomenon is the US Federal Reserve which happens to be amongst the largest world debtors. The Federal Reserve capitalizes on inflation to have reduced accrued interests on the debts whenever it makes debt repayments.

The following terms explain the different types of inflations experienced in any economy, these includes Hyperinflation; This is a type of inflation that results in more price incremental perhaps at a rate of 50% or more per month for the prices of goods and services above the marked price. This is usually initiated by a country’s government using printed money to pay for financial spending. This results in more money in circulation and therefore increased inflation rate. The government will, however, not stop money printing making, even more, money in circulation as it pays for its expenditure instead of trying to lower inflation by either reducing money in circulation or reducing expenditure budgets hence reduced need to print more currency for spending. The another form of inflation is Stagflation; This phenomenon occurs when an economy grows at a slower rate and usually have higher unemployment rates resulting in stagnation of the economy. This is usually followed by increasing prices, reduced Gross Domestic Product of the same economy and giving rise to relative higher inflation rates with a declining economic growth. However, it is not easy to quantify stagflation, and it is a more theoretical notion in economics as it rarely happens and most economists have not fully delved into its core of understandings.

Deflation is also another phenomenon that arises due to inflation. Deflation is basically a reduction in surplus money in any given economy. It is like the opposite of inflation and it is more of measure to stop inflation. Deflation gives rise to increased purchasing power of money in an economy it is often comparable to price deflation, but however it is distinct from it. The overall effect of deflation price reductions. Core Inflation: This is inflation phenomenon that measures inflation rate while having no inclusion of items that have volatility in their price changes since finding out the extent of core inflation needs exclusion. And the need of finding out what effects legitimacy of long-run inflation price changes, transitional price changes as well as short-term price volatility, may have and are often not needed in calculating estimates of core inflation. Core Inflation is computed from Consumer Price Index(CPI) which never includes products such as those found in food and energy sectors of the economy since these commodities usually have price shock instabilities. They usually do not give accurate inflation trends as they diverge mostly, depending on the type of economic inflation that is occurring in any given economy.

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