What does inflation mean in economics

For example, if the price of copper rises, companies that use copper to make their products might increase the prices of their goods. If the demand for the product is independent of the demand for copper, the business will pass on the higher costs of raw materials to consumers.

The result is higher prices for consumers without any change in demand for the products consumed. Wages also affect the cost of production and are typically the single biggest expense for businesses.

When the economy is performing well, and the unemployment rate is low, shortages in labor or workers can occur.

Companies, in turn, increase wages to attract qualified candidates, causing production costs to rise for the company. If the company raises prices due to the rise in employee wages, cost-plus inflation occurs. Natural disasters can also drive prices higher. For example, if a hurricane destroys a crop such as corn, prices can rise across the economy since corn is used in many products.

Demand-pull 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 reverberate 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. Economic expansion has a direct impact on the level of consumer spending in an economy, which can lead to a high demand for products and services. 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. Companies also play a role in inflation, especially if they manufacture popular products. A company can raise prices simply because consumers are willing to pay the increased amount. Corporations also raise prices freely when the item for sale is something consumers need for everyday existence, such as oil and gas.

However, it's the demand from consumers that provides the corporations with the leverage to raise prices. The housing market, for example, has seen its ups and downs over the years. If homes are in demand because the economy is experiencing an expansion, home prices will rise. The demand also impacts ancillary products and services that support the housing industry. Construction products such as lumber and steel, as well as the nails and rivets used in homes, might all see increases in demand resulting from higher demand for homes.

Expansionary fiscal policy by governments can increase the amount of discretionary income for both businesses and consumers. If a government cuts taxes, businesses may spend it on capital improvements, employee compensation, or new hiring. Consumers may purchase more goods as well. The government could also stimulate the economy by increasing spending on infrastructure projects.

The result could be an increase in demand for goods and services, leading to price increases. Expansionary monetary policy by central banks can lower interest rates. Too much inflation is generally considered bad for an economy, while too little inflation is also considered harmful. Generally speaking, higher inflation harms savers because it erodes the purchasing power of the money they have saved. However, it can benefit borrowers because the inflation-adjusted value of their outstanding debts shrinks over time.

Inflation can affect the economy in several ways. On the other hand, this could harm importers by making foreign-made goods more expensive. Higher inflation can also encourage spending, as consumers will aim to purchase goods quickly before their prices rise further.

Savers, on the other hand, could see the real value of their savings erode, limiting their ability to spend or invest in the future. Bureau of Labor Statistics. Inflation Data. Federal Reserve History. Federal Reserve. European Central Bank. Reserve Bank of India. Central Bank of Brazil. Actively scan device characteristics for identification.

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Table of Contents Expand. What Is Inflation? Causes of Inflation. Types of Price Indexes. Formula for Measuring Inflation. Pros and Cons of Inflation. Controlling Inflation. Hedging Against Inflation. Rising wages is exactly what it sounds like — an increase in what's being paid to workers. The exception is if they can offset wage growth with higher productivity. However, economists remain mixed on the impact of gradual increases in wages, like raising the minimum wage, compared to faster, more sudden wage growth seen in places like Silicon Valley.

Some believe that an increase in wages could result in cost-push inflation due to the higher cost to businesses, while others believe that higher wages across the board not just concentrated in certain sectors will also increase demand enough to offset a spike in prices.

Toney, Ph. D, endowed chair of Business and Economics at Hampton University. Certain policies can also result in either a cost-push or demand-pull inflation. When the government issues tax subsidies for certain products, it can increase demand. If that demand is higher than supply, costs could rise. Additionally, stringent building regulations and even rent stabilization policies could inadvertently increase costs and create an inflationary environment by passing those costs to residents or artificially reduce the supply of housing.

Under normal financial circumstances, this means that your money is worth less each year, unless it is gaining an interest rate greater than or equal to inflation.

To ensure that your money is keeping pace with inflation, consider annual salary increases or cost of living adjustments by your employer. If you're an entrepreneur, consider raising your rates incrementally. On the consumer side: "Remember that inflation is typically uneven," adds Baker. Investing your money is also an effective tactic to beat inflation as well.

The only caveat is if they have funds invested that are earning a higher rate of return than the inflation rate," says Toney. Other hedges for inflation may include corporate bonds and dividend paying stocks and index funds.

For you. This is called cost-push inflation. This spirals to further increase in the prices of goods. Is Inflation bad for everyone?

Inflation is perceived differently by everyone depending upon the kind of assets they possess. For someone with investments in real estate or stocked commodity, inflation means that the prices of their assets is set for a hike.

For those who possess cash, they may be adversely affected by inflation as the value of their cash erodes. Like us on Facebook and follow us on Twitter. Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates. By: FE Knowledge Desk.