Inflation- A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money caused by an increase in available currency and credit beyond the proportion of available goods and services.
Over the long term, inflation erodes the purchasing power of your income and wealth. That means that even as you save and invest, your accumulated wealth buys less and less.
How to Measure Inflation
Every month the Government surveys prices and generates the current consumer price index (CPI). This allows you to compare current figures with past figures
The Causes of Inflation
Inflation results when the macro economy has too much demand for available production.
Demand-Pull Inflation: This inflation occurs when the government / consumers / business try to purchase more output than the economy is capable of producing.
Cost-Push Inflation: Cost-push inflation is inflation due to decreases in supply, primarily due to increases in production cost
Inflation & Governmental Policy
Governments try and control inflation using the following tools:
- An increase in interest rates
- Legislation reducing trade union power
- Reduced expectations of inflation allowing businesses more confidence when setting prices
The bank of England tries to control the rate of inflation by using interest rates to try and prevent aggregate demand increasing more rapidly than the underlying trend in growth
Deflation
Deflation occurs when there is a fall in the general level of prices. Deflation can happen in the whole economy or in specific sectors of the economy.
Deflation may be due to an increase in technology which has meant costs have decreased and these have been passed on to the consumer.
In January 2007 there was deflation in the UK grocery market as the price of many foods decreased
