Inflation is the index of general growth of prices for goods and services

What is Inflation: Reasons and Consequences

What is inflation? What are the reasons for it? How does it influence the economy, and what methods are there to control it? In this article, we will try to answer these questions. Let us get started.

What is inflation

Inflation is the index of general growth of prices for goods and services. When prices grow, a unit of the national currency can buy fewer goods and services. Hence, inflation facilitates a decrease in the purchasing power of money. The opposite of inflation is deflation, which is a stable decline of the prices for goods and services.
In other words, inflation is the speed (expressed in pecent) of the growth of general price levels for goods and services. Inflation levels demonstrate how high prices have grown in the country over a certain timeframe. Inflation leads to an increase in the prices for various assets over time. The higher reaches inflation, the more prices grow.

Understanding Inflation

While it is easy to measure the price changes of individual products over time, human needs extend beyond just one or two products. Individuals need a big and diversified set of products as well as a host of services for living a comfortable life. They include commodities like food grains, metal, fuel, utilities like electricity and transportation, and services like healthcare, entertainment, and labor.
Inflation aims to measure the overall impact of price changes for a diversified set of products and services. It allows for a single value representation of the increase in the price level of goods and services in an economy over a period of time.


According to poll by Gallup, 32% of Americans consider growing inflation their main financail problem this year

Methods of controlling inflation

The financial regulator of the country bears the responsibility of fighting back inflation. This is done by certain measures of the credit and monetary policy. Here are the main methods by which Central Banks can influence inflation.
The CB can sell securities in the open market, increse reserving norms for commercial banks, and apply other measures of selective credit control. Increases in the interest rate have a bad influence on the stock market but facilitates growth of the national currency.
Growth of price for cup of coffee due to inflation in the US