inflation essay

What is inflation?

Inflation has been top of mind for many over the past few years. But how long will it persist? In June 2022, inflation in the United States jumped to 9.1 percent, reaching the highest level since February 1982. The inflation rate has since slowed in the United States , as well as in Europe , Japan , and the United Kingdom , particularly in the final months of 2023. But even though global inflation is higher than it was before the COVID-19 pandemic, when it hovered around 2 percent, it’s receding to historical levels . In fact, by late 2022, investors were predicting that long-term inflation would settle around a modest 2.5 percent. That’s a far cry from fears that long-term inflation would mimic trends of the 1970s and early 1980s—when inflation exceeded 10 percent.

Get to know and directly engage with senior McKinsey experts on inflation.

Ondrej Burkacky is a senior partner in McKinsey’s Munich office, Axel Karlsson is a senior partner in the Stockholm office, Fernando Perez is a senior partner in the Miami office, Emily Reasor is a senior partner in the Denver office, and Daniel Swan is a senior partner in the Stamford, Connecticut, office.

Inflation refers to a broad rise in the prices of goods and services across the economy over time, eroding purchasing power for both consumers and businesses. Economic theory and practice, observed for many years and across many countries, shows that long-lasting periods of inflation are caused in large part by what’s known as an easy monetary policy . In other words, when a country’s central bank sets the interest rate too low or increases money growth too rapidly, inflation goes up. As a result, your dollar (or whatever currency you use) will not go as far  today as it did yesterday. For example: in 1970, the average cup of coffee in the United States cost 25 cents; by 2019, it had climbed to $1.59. So for $5, you would have been able to buy about three cups of coffee in 2019, versus 20 cups in 1970. That’s inflation, and it isn’t limited to price spikes for any single item or service; it refers to increases in prices across a sector, such as retail or automotive—and, ultimately, a country’s economy.

How does inflation affect your daily life? You’ve probably seen high rates of inflation reflected in your bills—from groceries to utilities to even higher mortgage payments. Executives and corporate leaders have had to reckon with the effects of inflation too, figuring out how to protect margins while paying more for raw materials.

But inflation isn’t all bad. In a healthy economy, annual inflation is typically in the range of two percentage points, which is what economists consider a sign of pricing stability. When inflation is in this range, it can have positive effects: it can stimulate spending and thus spur demand and productivity when the economy is slowing down and needs a boost. But when inflation begins to surpass wage growth, it can be a warning sign of a struggling economy.

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Inflation may be declining in many markets, but there’s still uncertainty ahead: without a significant surge in productivity, Western economies may be headed for a period of sustained inflation or major economic reset , as Japan has experienced in the first decades of the 21st century.

What does seem to be changing are leaders’ attitudes. According to the 2023 year-end McKinsey Global Survey on economic conditions , respondents reported less fear about inflation as a risk to global and domestic economic growth . But this sentiment varies significantly by region: European respondents were most concerned about the effects of inflation, whereas respondents in North America offered brighter views.

What causes inflation?

Monetary policy is a critical driver of inflation over the long term. The current high rate of inflation is a result of increased money supply , high raw materials costs , labor mismatches , and supply disruptions —exacerbated by geopolitical conflict .

In general, there are two primary types, or causes, of short-term inflation:

• Demand-pull inflation occurs when the demand for goods and services in the economy exceeds the economy’s ability to produce them. For example, when demand for new cars recovered more quickly than anticipated from its sharp dip at the beginning of the COVID-19 pandemic, an intervening shortage  in the supply of semiconductors  made it hard for the automotive industry to keep up with this renewed demand. The subsequent shortage of new vehicles resulted in a spike in prices for new and used cars.
• Cost-push inflation occurs when the rising price of input goods and services increases the price of final goods and services. For example, commodity prices spiked sharply  during the pandemic as a result of radical shifts in demand, buying patterns, cost to serve, and perceived value across sectors and value chains. To offset inflation and minimize impact on financial performance, industrial companies were forced to increase prices for end consumers.

Learn more about McKinsey’s Growth, Marketing & Sales  Practice.

What are some periods in history with high inflation?

Economists frequently compare the current inflationary period with the post–World War II era , when price controls, supply problems, and extraordinary demand in the United States fueled double-digit inflation gains—peaking at 20 percent in 1947—before subsiding at the end of the decade. Consumption patterns today have been similarly distorted, and supply chains have been disrupted  by the pandemic.

The period from the mid-1960s through the early 1980s in the United States, sometimes called the “Great Inflation,” saw some of the country’s highest rates of inflation, with a peak of 14.8 percent in 1980. To combat this inflation, the Federal Reserve raised interest rates to nearly 20 percent. Some economists attribute this episode partially to monetary policy mistakes rather than to other causes, such as high oil prices. The Great Inflation signaled the need for public trust  in the Federal Reserve’s ability to lessen inflationary pressures.

Inflation isn’t solely a modern-day phenomenon, of course. One very early example of inflation comes from Roman times, from around 200 to 300 CE. Roman leaders were struggling to fund an army big enough to deal with attackers from multiple fronts. To help, they watered down  the silver in their coinage, causing the value of money to slowly fall—and inflation to pick up. This led merchants to raise their prices, causing widespread panic. In response, the emperor Diocletian issued what’s now known as the Edict on Maximum Prices, a series of price and wage controls designed to stop the rise of prices and wages (one helpful control was a maximum price for a male lion). But because the edict didn’t address the root cause of inflation—the impure silver coin—it didn’t fix the problem.

How is inflation measured?

Statistical agencies measure inflation first by determining the current value of a “basket” of various goods and services consumed by households, referred to as a price index. To calculate the rate of inflation over time, statisticians compare the value of the index over one period with that of another. Comparing one month with another gives a monthly rate of inflation, and comparing from year to year gives an annual rate of inflation.

In the United States, the Bureau of Labor Statistics publishes its Consumer Price Index (CPI), which measures the cost of items that urban consumers buy out of pocket. The CPI is broken down by region and is reported for the country as a whole. The Personal Consumption Expenditures (PCE) price index —published by the US Bureau of Economic Analysis—takes into account a broader range of consumer spending, including on healthcare. It is also weighted by data acquired through business surveys.

How does inflation affect consumers and companies differently?

Inflation affects consumers most directly, but businesses can also feel the impact:

• Consumers lose purchasing power when the prices of items they buy, such as food, utilities, and gasoline, increase. This can lead to household belt-tightening and growing pessimism about the economy .
• Companies lose purchasing power and risk seeing their margins decline , when prices increase for inputs used in production. These can include raw materials like coal and crude oil , intermediate products such as flour and steel, and finished machinery. In response, companies typically raise the prices of their products or services to offset inflation, meaning consumers absorb these price increases. The challenge for many companies is to strike the right balance between raising prices to cover input cost increases while simultaneously ensuring that they don’t raise prices so much that they suppress demand.

How can organizations respond to high inflation?

During periods of high inflation, companies typically pay more for materials , which decreases their margins. One way for companies to offset losses and maintain margins is by raising prices for consumers. However, if price increases are not executed thoughtfully, companies can damage customer relationships and depress sales —ultimately eroding the profits they were trying to protect.

When done successfully, recovering the cost of inflation for a given product can strengthen relationships and overall margins. There are five steps companies can take to ADAPT  (adjust, develop, accelerate, plan, and track) to inflation:

• Adjust discounting and promotions and maximize nonprice levers. This can include lengthening production schedules or adding surcharges and delivery fees for rush or low-volume orders.
• Develop the art and science of price change. Instead of making across-the-board price changes, tailor pricing actions to account for inflation exposure, customer willingness to pay, and product attributes.
• Accelerate decision making tenfold. Establish an “inflation council” that includes dedicated cross-functional, inflation-focused decision makers who can act quickly and nimbly on customer feedback.
• Plan options beyond pricing to reduce costs. Use “value engineering” to reimagine a portfolio and provide cost-reducing alternatives to price increases.
• Track execution relentlessly. Create a central supporting team to address revenue leakage and to manage performance rigorously. Traditional performance metrics can be less reliable when inflation is high .

Beyond pricing, a variety of commercial and technical levers can help companies deal with price increases in an inflationary market , but other sectors may require a more tailored response to pricing.

Learn more about our Financial Services , Industrials & Electronics , Operations , Strategy & Corporate Finance , and  Growth, Marketing & Sales Practices.

How can CEOs help protect their organizations against uncertainty during periods of high inflation?

In today’s uncertain environment, in which organizations have a much wider range of stakeholders, leaders must think about performance beyond short-term profitability. CEOs should lead with the complete business cycle and their complete slate of stakeholders in mind.

CEOs need an inflation management playbook , just as central bankers do. Here are some important areas to keep in mind while scripting it:

• Design. Leaders should motivate their organizations to raise the profile of design  to a C-suite topic. Design choices for products and services are critical for responding to price volatility, scarcity of components, and higher production and servicing costs.
• Supply chain. The most difficult task for CEOs may be convincing investors to accept supply chain resiliency as the new table stakes. Given geopolitical and economic realities, supply chain resiliency has become a crucial goal for supply chain leaders, alongside cost optimization.
• Procurement. CEOs who empower their procurement  organizations can raise the bar on value-creating contributions. Procurement leaders have told us time and again that the current market environment is the toughest they’ve experienced in decades. CEOs are beginning to recognize that purchasing leaders can be strategic partners by expanding their focus beyond cost cutting to value creation.
• Feedback. A CEO can take a lead role in playing back the feedback the organization is hearing. In today’s tight labor market, CEOs should guide their companies to take a new approach to talent, focusing on compensation, cultural factors, and psychological safety .
• Pricing. Forging new pricing relationships with customers will test CEOs in their role as the “ultimate integrator.” Repricing during inflationary times is typically unpleasant for companies and customers alike. With setting new prices, CEOs have the opportunity to forge deeper relationships with customers, by turning to promotions, personalization , and refreshed communications around value.
• Agility. CEOs can strive to achieve a focus based more on strategic action and less on firefighting. Managing the implications of inflation calls for a cross-functional, disciplined, and agile response.

A practical example: How is inflation affecting the US healthcare industry?

Consumer prices for healthcare have rarely risen faster than the rate of inflation—but that’s what’s happening today. The impact of inflation on the broader economy has caused healthcare costs to rise faster than the rate of inflation. Experts also expect continued labor shortages in healthcare—gaps of up to 450,000 registered nurses and 80,000 doctors —even as demand for services continues to rise. This drives up consumer prices and means that higher inflation could persist. McKinsey analysis as of 2022 predicted that the annual US health expenditure is likely to be $370 billion higher by 2027 because of inflation.

This climate of risk could spur healthcare leaders to address productivity, using tech levers to boost productivity while also reducing costs. In order to weather the storm, leaders will need to quickly set high aspirations, align their organizations around them, and execute with speed .

What is deflation?

If inflation is one extreme of the pricing spectrum, deflation is the other. Deflation occurs when the overall level of prices in an economy declines and the purchasing power of currency increases. It can be driven by growth in productivity and the abundance of goods and services, by a decrease in demand, or by a decline in the supply of money and credit.

Generally, moderate deflation positively affects consumers’ pocketbooks, as they can purchase more with less money. However, deflation can be a sign of a weakening economy, leading to recessions and depressions. While inflation reduces purchasing power, it also reduces the value of debt. During a period of deflation, on the other hand, debt becomes more expensive. And for consumers, investments such as stocks, corporate bonds, and real estate become riskier.

A recent period of deflation in the United States was the Great Recession, between 2007 and 2008. In December 2008, more than half of executives surveyed by McKinsey  expected deflation in their countries, and 44 percent expected to decrease the size of their workforces.

When taken to their extremes, both inflation and deflation can have significant negative effects on consumers, businesses, and investors.

For more in-depth exploration of these topics, see McKinsey’s Operations Insights  collection. Learn more about Operations consulting , and check out operations-related job opportunities  if you’re interested in working at McKinsey.

Articles referenced:

• “ Investing in productivity growth ,” March 27, 2024, Jan Mischke , Chris Bradley , Marc Canal, Olivia White , Sven Smit , and Denitsa Georgieva
• “ Economic conditions outlook during turbulent times, December 2023 ,” December 20, 2023
• “ Forward Thinking on why we ignore inflation—from ancient times to the present—at our peril with Stephen King ,” November 1, 2023
• “ Procurement 2023: Ten CPO actions to defy the toughest challenges ,” March 6, 2023, Roman Belotserkovskiy , Carolina Mazuera, Marta Mussacaleca , Marc Sommerer, and Jan Vandaele
• “ Why you can’t tread water when inflation is persistently high ,” February 2, 2023, Marc Goedhart and Rosen Kotsev
• “ Markets versus textbooks: Calculating today’s cost of equity ,” January 24, 2023, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm  
• “ Inflation-weary Americans are increasingly pessimistic about the economy ,” December 13, 2022, Gonzalo Charro, Andre Dua , Kweilin Ellingrud , Ryan Luby, and Sarah Pemberton
• “ Inflation fighter and value creator: Procurement’s best-kept secret ,” October 31, 2022, Roman Belotserkovskiy , Ezra Greenberg , Daphne Luchtenberg, and Marta Mussacaleca
• “ Prime Numbers: Rethink performance metrics when inflation is high ,” October 28, 2022, Vartika Gupta, David Kohn, Tim Koller , and Werner Rehm
• “ The gathering storm: The threat to employee healthcare benefits ,” October 20, 2022, Aditya Gupta , Akshay Kapur , Monisha Machado-Pereira , and Shubham Singhal
• “ Utility procurement: Ready to meet new market challenges ,” October 7, 2022, Roman Belotserkovskiy , Abhay Prasanna, and Anton Stetsenko
• “ The gathering storm: The transformative impact of inflation on the healthcare sector ,” September 19, 2022, Addie Fleron, Aneesh Krishna , and Shubham Singhal
• “ Pricing during inflation: Active management can preserve sustainable value ,” August 19, 2022, Niels Adler and Nicolas Magnette
• “ Navigating inflation: A new playbook for CEOs ,” April 14, 2022, Asutosh Padhi , Sven Smit , Ezra Greenberg , and Roman Belotserkovskiy
• “ How business operations can respond to price increases: A CEO guide ,” March 11, 2022, Andreas Behrendt ,  Axel Karlsson , Tarek Kasah, and  Daniel Swan
• “ Five ways to ADAPT pricing to inflation ,” February 25, 2022,  Alex Abdelnour , Eric Bykowsky, Jesse Nading,  Emily Reasor , and Ankit Sood
• “ How COVID-19 is reshaping supply chains ,” November 23, 2021,  Knut Alicke ,  Ed Barriball , and Vera Trautwein
• “ Navigating the labor mismatch in US logistics and supply chains ,” December 10, 2021,  Dilip Bhattacharjee , Felipe Bustamante, Andrew Curley, and  Fernando Perez
• “ Coping with the auto-semiconductor shortage: Strategies for success ,” May 27, 2021,  Ondrej Burkacky , Stephanie Lingemann, and Klaus Pototzky

This article was updated in April 2024; it was originally published in August 2022.

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100 Inflation Essay Topic Ideas & Examples

Inside This Article

Inflation is a key economic indicator that affects the purchasing power of consumers and the overall health of an economy. As such, it is a popular topic for essays and research papers in economics, finance, and related fields. If you are looking for inspiration for your next inflation essay, look no further. Here are 100 inflation essay topic ideas and examples to help you get started:

• The causes and effects of inflation
• The relationship between inflation and unemployment
• The impact of inflation on interest rates
• The role of the Federal Reserve in controlling inflation
• The differences between demand-pull and cost-push inflation
• The effects of hyperinflation on a country's economy
• The impact of inflation on fixed income earners
• The relationship between inflation and the stock market
• The effects of inflation on real estate prices
• The impact of inflation on international trade
• The role of inflation expectations in shaping economic behavior
• The effects of inflation on poverty and income inequality
• The impact of inflation on retirement savings
• The relationship between inflation and economic growth
• The effects of inflation on consumer spending
• The role of inflation in shaping monetary policy decisions
• The impact of inflation on business investment
• The effects of inflation on government finances
• The relationship between inflation and currency exchange rates
• The impact of inflation on the cost of living
• The effects of inflation on social welfare programs
• The role of inflation in causing economic recessions
• The impact of inflation on international competitiveness
• The effects of inflation on the environment
• The relationship between inflation and financial stability
• The role of inflation in shaping government policy decisions
• The impact of inflation on entrepreneurship and innovation
• The effects of inflation on consumer confidence
• The relationship between inflation and technological advancement
• The impact of inflation on the healthcare industry
• The effects of inflation on the education sector
• The role of inflation in shaping consumer behavior
• The impact of inflation on the agricultural sector
• The relationship between inflation and social mobility
• The effects of inflation on urban development
• The role of inflation in shaping labor market dynamics
• The impact of inflation on small businesses
• The effects of inflation on the tourism industry
• The relationship between inflation and government regulations
• The impact of inflation on infrastructure development
• The role of inflation in shaping energy policy
• The effects of inflation on the manufacturing sector
• The relationship between inflation and the digital economy
• The impact of inflation on the gig economy
• The effects of inflation on the sharing economy
• The role of inflation in shaping consumer preferences
• The impact of inflation on the automotive industry
• The relationship between inflation and the housing market
• The effects of inflation on the retail sector
• The impact of inflation on the hospitality industry
• The role of inflation in shaping supply chain dynamics
• The effects of inflation on the fashion industry
• The relationship between inflation and the art market
• The impact of inflation on the entertainment industry
• The effects of inflation on the music industry
• The role of inflation in shaping the sports industry
• The relationship between inflation and the gaming industry
• The impact of inflation on the film industry
• The effects of inflation on the publishing industry
• The role of inflation in shaping the food and beverage industry
• The impact of inflation on the beauty and personal care industry
• The effects of inflation on the health and wellness industry
• The relationship between inflation and the pharmaceutical industry
• The impact of inflation on the technology industry
• The effects of inflation on the telecommunications industry
• The role of inflation in shaping the media industry
• The relationship between inflation and the advertising industry
• The impact of inflation on the e-commerce industry
• The effects of inflation on the transportation industry
• The role of inflation in shaping the logistics industry
• The impact of inflation on the energy industry
• The effects of inflation on the renewable energy industry
• The relationship between inflation and the oil and gas industry
• The impact of inflation on the mining industry
• The effects of inflation on the construction industry
• The role of inflation in shaping the real estate industry
• The relationship between inflation and the property market
• The impact of inflation on the architecture and design industry
• The effects of inflation on the engineering industry
• The role of inflation in shaping the manufacturing industry
• The effects of inflation on the aerospace industry
• The relationship between inflation and the defense industry
• The impact of inflation on the security industry
• The effects of inflation on the law enforcement industry
• The role of inflation in shaping the healthcare industry
• The impact of inflation on the medical devices industry
• The effects of inflation on the biotechnology industry
• The role of inflation in shaping the life sciences industry
• The impact of inflation on the education industry
• The effects of inflation on the e-learning industry
• The relationship between inflation and the edtech industry
• The impact of inflation on the publishing industry
• The effects of inflation on the media and entertainment industry
• The role of inflation in shaping the sports and recreation industry
• The relationship between inflation and the leisure and travel industry
• The impact of inflation on the tourism and hospitality industry
• The effects of inflation on the food and beverage industry
• The role of inflation in shaping the retail and consumer goods industry

These are just a few examples of the many possible topics you could explore in an inflation essay. Whether you are interested in the macroeconomic implications of inflation or its effects on specific industries, there is no shortage of interesting and important questions to investigate. So pick a topic that interests you, do some research, and start writing!

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Essay on Inflation

Students are often asked to write an essay on Inflation in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Inflation

Understanding inflation.

Inflation is when prices of goods and services rise over time. This means you need more money to buy the same things. It’s like a slow-motion robbery!

Causes of Inflation

Inflation is often due to increased production costs or increased demand for goods and services. When people want more of something, and it’s scarce, prices go up.

Impact of Inflation

Inflation affects everyone. If your income doesn’t increase as fast as inflation, you’ll have less buying power. But, if you’re a business owner, you might be able to raise prices and make more money.

Controlling Inflation

Governments try to control inflation by adjusting interest rates, taxes, and government spending. It’s a tricky balancing act to keep inflation low but not too low.

250 Words Essay on Inflation

Inflation, a crucial economic concept, refers to the rate at which the general level of prices for goods and services is rising, subsequently eroding purchasing power. It’s an indicator of the economic health of a nation, with moderate inflation signifying a growing economy.

The Causes of Inflation

Inflation generally occurs due to two primary factors: demand-pull and cost-push inflation. Demand-pull inflation transpires when demand for goods and services surpasses their supply. On the other hand, cost-push inflation arises when the costs of production escalate, causing producers to increase prices to maintain profit margins.

Effects of Inflation

Inflation impacts various aspects of the economy. It erodes the purchasing power of money, causing consumers to spend more for the same goods or services. Inflation can also create uncertainty in the economy, affecting investment and saving decisions. However, moderate inflation can stimulate spending and investment, driving economic growth.

Managing Inflation

Central banks attempt to control inflation through monetary policy. By adjusting interest rates, they influence the level of spending and investment in the economy. Higher interest rates typically reduce spending, curbing inflation. Conversely, lower interest rates stimulate spending, potentially leading to inflation.

Inflation is a complex and multifaceted subject. Understanding its causes, effects, and the measures to control it is essential for both macroeconomic stability and individual financial well-being. As future leaders, it’s crucial for us as students to grasp these concepts to make informed decisions in our professional and personal lives.

500 Words Essay on Inflation

Introduction to inflation.

Inflation is primarily caused by an increase in the money supply that outpaces economic growth. Ever since the end of the gold standard, governments have had the ability to create money at will. If a nation’s money supply grows too rapidly compared to its production of goods and services, prices will increase, leading to inflation.

Additionally, inflation can be spurred by demand-pull conditions, where demand for goods and services exceeds their supply. Cost-push inflation, on the other hand, occurs when the costs of production increase, causing producers to raise prices to maintain their profit margins.

Impacts of Inflation

Moreover, inflation can harm savers if the inflation rate surpasses the interest rate on their savings. It also favors borrowers, as the real value of their debt diminishes over time. This redistribution of wealth from savers to borrowers can lead to social and economic inequalities.

Central banks use monetary policy to control inflation. They adjust the money supply by setting interest rates and through open market operations. By raising interest rates, central banks can decrease the money supply, making borrowing more expensive and slowing economic activity, thereby reducing inflation.

Inflation is an intricate part of our economic systems. It is a double-edged sword that can stimulate economic growth when mild, but can also lead to economic instability when it becomes too high. Understanding inflation is crucial for policymakers, investors, and consumers alike as it influences our decisions and shapes our economic reality. By effectively managing inflation, governments can promote economic stability and growth, thereby improving the standard of living for their citizens.

If you’re looking for more, here are essays on other interesting topics:

Apart from these, you can look at all the essays by clicking here .

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Economic essays on inflation

• Definition – Inflation – Inflation is a sustained rise in the cost of living and average price level.
• Causes Inflation – Inflation is caused by excess demand in the economy, a rise in costs of production, rapid growth in the money supply.

• Costs of Inflation – Inflation causes decline in value of savings, uncertainty, confusion and can lead to lower investment.

• Problems measuring inflation – why it can be hard to measure inflation with changing goods.
• Different types of inflation – cost-push inflation, demand-pull inflation, wage-price spiral,
• How to solve inflation . Policies to reduce inflation, including monetary policy, fiscal policy and supply-side policies.
• Trade off between inflation and unemployment . Is there a trade-off between the two, as Phillips Curve suggests?
• The relationship between inflation and the exchange rate – Why high inflation can lead to a depreciation in the exchange rate.
• What should the inflation target be? – Why do government typically target inflation of 2%
• Deflation – why falling prices can lead to negative economic growth.
• Monetarist Theory – Monetarist theory of inflation emphasises the role of the money supply.
• Criticisms of Monetarism – A look at whether the monetarist theory holds up to real-world scenarios.
• Money Supply   – What the money supply is.
• Can we have economic growth without inflation?
• Predicting inflation
• Link between inflation and interest rates
• Should low inflation be the primary macroeconomic objective?

See also notes on Unemployment

Facing down a surprising U.S. inflation surge

Kennedy School experts in public finance and economic policy weigh in on the causes and responses to the highest American consumer price jump in three decades.

Inflation in the United States has jumped to the highest level in 30 years, reaching 6.2% in October as measured by the Consumer Price Index. The COVID-19 pandemic has fueled consumer demand for goods and services at a time when supply lines are constrained and many industries have been affected by staff shortages. The inflation surge has generated intense political debate on the causes and the appropriate response.

We asked several economists and public finance experts at Harvard Kennedy School—all of whom have held senior federal government economics roles—to offer brief perspectives on how they view the underlying issues and the key policy choices facing the Biden administration and Congress. 

• Linda Bilmes - Inflation's impact at the state and local level
• Karen Dynan - Weighing the uncertainties
• Jeffrey Frankel - Inflation Do's and Don'ts
• Jason Furman - Supply and demand challenges
• Lawrence H. Summers - Biden team needs to signal its concern about inflation

Inflation risks also lie ahead for state and local governments

On the revenue side, income and sales tax receipts will largely keep pace with inflation, so moderate inflation is unlikely to have a major impact. However, if inflation leads to sharply higher interest rates that lead to a stock market sell-off, then states that are highly dependent on capital gains taxes (such as California and New Jersey) may suffer. Another area of vulnerability could be property taxes, especially states where increases in assessed values or in property taxes are capped, as with California’s Prop. 13. These prevent rising house prices feeding through into state revenues, and are also the major revenue source for local governments.

On the expense side, the biggest risk is rising wages, which consume the largest share of state budgets. We could see public sector unions pushing for a return of “CPI-plus” language in new labor agreements. This would automatically bake in the cost of higher inflation to local expenditures. In addition, high inflation could significantly weaken state pension plans, many of which assume that future wage increases will be only 2%.  Most of the current generation of local pension managers have little experience with inflation. They need to begin adjusting their portfolios now to prevent erosion of their asset bases.

Linda Bilmes is the Daniel Patrick Moynihan Lecturer in Public Policy and previously served as Assistant Secretary of Commerce.

What's certain is just how many uncertainties lie ahead

What is not clear is how quickly these issues will resolve. The size and persistence of demand/supply imbalances has repeatedly surprised us, in part because virus caseloads have stayed unexpectedly high. We have only a limited understanding of why so many would-be workers are staying out of the labor force, making it hard to predict how many will return and how quickly. We are not sure how much inflation expectations have risen (a critical determinant of whether higher inflation sticks) because of measurement difficulties.

This uncertainty makes it difficult for monetary policymakers to know when they need to begin raising rates to avoid letting inflation stay at undesirably high levels. Given that they may need to revise their views quickly based on incoming data, it is especially important that they communicate the high degree of uncertainty. Surprising financial markets with an abrupt unexpected change in policy could lead to a rapid decline in asset prices that causes a significant setback in the economic recovery.

Karen Dynan is a professor of the practice of economics and former chief economist of the U.S. Treasury.

Some inflation-fighting do's and don'ts

Let’s start with two don'ts.

• Don’t do what Federal Reserve Chair Arthur Burns and President Richard Nixon did in 1971, in order to help the president’s reelection: They responded to moderate 5% to 6 % inflation with a combination of rapid monetary stimulus and doomed wage-price controls. The lid was blown off the boiling pot a few years later; the inflation rate jumped above 12%.
• Don’t do what Donald Trump did on April 2, 2020 , to help out American oil producers: He persuaded Saudi Arabia that OPEC must cut oil output and raise prices.
• Continue to fight in the Senate for a fully funded social spending bill (“Build Back Better”).
• Let imports into the country more easily.  They are a safety valve for an overheated economy.  Trump put up a lot of import tariffs , which raise prices to consumers—sometimes directly, as with washing machines, and sometimes indirectly, as with steel and aluminum, which are important inputs into autos and countless other goods. With or without foreign reciprocation, U.S. trade liberalization could bring prices down quickly in many supply-constrained sectors. 
• Similarly, facilitating orderly immigration would help alleviate the shortage of workers that employers in some sectors are experiencing.
• Further vaccination would increase the supply of labor, through several possible channels.  One channel would be to keep children in school, allowing more parents to go back to work. Another channel is to alleviate worker’s fears of infection in the workplace. 

Jeffrey Frankel is the James W. Harpel Professor of Capital Formation and Growth and was a member of the Council of Economic Advisors from 1983-1984 and 1996-1999.   

Supply and demand—and the Federal Reserve’s key role

Economists like to explain everything with demand and supply, and the concepts work well here. Demand is likely to remain high, fueled by households with healthy balance sheets, continued fiscal support, and very low interest rates. No one knows how long it will take supply to recover, or even whether it will fully recover, but it could be at least a year. The combination of strong demand and weak supply will likely keep inflation uncomfortably high.

President Biden can do a little about inflation by helping with port capacity and other supply-chain measures. Even better would be dropping President Trump’s tariffs on China. But these steps would only be small. The main agency charged with controlling inflation is the Federal Reserve. They are right to continue to be focused on the millions of people without jobs but should recalibrate towards incorporating more concern for inflation into their policy stance, including setting a default of more rate increases in 2022, something it can call off if inflation and/or employment is well below what we are currently expecting.

Jason Furman is the Aetna Professor of the Practice of Economic Policy and previously was chair of the Council of Economic Advisors under President Obama.

Biden team needs to signal its determination to address inflation

 Simultaneously, the Administration should signal that a concern about inflation will inform its policies generally. Measures already taken to reduce port bottlenecks may have limited effect but are a clear positive step. Buying inexpensively should take priority over buying American. Tariff reduction is the most important supply-side policy the administration could undertake to combat inflation. Raising fossil fuel supplies, such as the recent deployment of the Strategic Petroleum Reserve, is crucial. And financial regulators need to step up and be attentive to the pockets of speculative excess that are increasingly evident in financial markets.

 Excessive inflation and a sense that it was not being controlled helped elect Richard Nixon and Ronald Reagan, and risks bringing Donald Trump back to power. While an overheating economy is a relatively good problem to have compared to a pandemic or a financial crisis, it will metastasize and threaten prosperity and public trust unless clearly acknowledged and addressed.

Lawrence H. Summers is Charles W. Eliot University Professor , Weil Director of the Mossavar-Rahmani Center for Business and Government,  and president emeritus of Harvard University. His government positions included Secretary of the Treasury in the Clinton Administration and Director of the National Economic Council under President Obama. Portions of this essay were excerpted from a Washington Post column .

Banner image by AP Photo/Noah Berger; inline image by Xinhua via Getty Images; faculty portraits by Martha Stewart

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Essay on Inflation: Meaning, Measurement and Causes

Let us make in-depth study of the meaning, measurement and causes of inflation.

Meaning of Inflation:

By inflation we mean a general rise in prices. To be more correct, inflation is a persistent rise in general price level rather than a once-for-all rise in it.

Rate of inflation is either measured by the percentage change in wholesale price index number (WPI) over a period or by percentage change in consumer price index number (CPI).

Opinion surveys conducted in India and the United States reveal that inflation is the most important concern of the people as it affects their standard of living adversely A high rate of inflation erodes the real incomes of the people. A high rate of infla­tion makes the life of the poor people miserable. It is therefore described as anti-poor, inflation redistributes income and wealth in favour of the rich.

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Thus, it makes the rich richer and the poor poorer. Above all, a high rate inflation adversely effects output and encourages investment in unproductive channels such as purchase of gold, silver, jewellery and real estate. Therefore, it adversely affects long-run economic growth, especially in developing countries like India. Inflation has therefore been described ‘as enemy number one’.

Measurement of Rate of Inflation:

Inflation has been one of the important problems facing the economies of the world. Precisely stated, inflation is the rate of change of general price level during a period of time. And the general price level in a period is the result of inflation in the past. Through rate of inflation economists measures the cost of living in an economy. Let us explain how rate of inflation is measured. Suppose P i X represents the price level on 31st March 2006 and P represents the price level on 31st March 2007. Then the rate of inflation in year 2006-07 will be equal to

Thus, rate of inflation during 2006-07 will be 10 per cent. This is called point-to-point inflation rate. There are 52 weeks in a year, average of price indexes of 52 weeks of a year (say 2005-06) can be calculated to compare the average of price indexes of 52 weeks of year 2006-07 and find the inflation rate on the basis of average weekly price levels of a year. In both these ways rate of inflation in different years is measured and compared.

It is evident from above that price level in a period is measured by a price index. There are several commodities in an economy which are produced and consumed by the people. It is through construction of a weighted price index that economists aggregate money prices of several commodi­ties which are assigned different weights.

In India the wholesale price Index (WPI) of all commodities with base year 1993-94 price level at the end of fiscal year is used to measure rate of inflation and is widely reported in the media. Since the wholesale price index does not truly indicate the cost of living, separate Consumer Price Index (CPI) for agricultural labourers and Consumer Price Index (CPI) for industrial workers (with base 1982 = 100) at the end of fiscal year are constructed to measure rate of inflation.

In constructing the Consumer Price Index (CPI) the price of a basket of goods which a typical consumer, industrial worker or agricultural labourer as the case may be are taken into account.

What Causes Inflation?

1. keynes’s view:.

Classical economists thought that it was the quantity of money in the economy that determined the general price level in the economy. According to them, rate of inflation depends on the growth of money supply in the economy. Keynes criticized the ‘ Quantity Theory of Money’ and showed that expansion in money supply did not always lead to inflation or rise in price level.

Keynes who before the Second World War explained that involuntary unemployment and depression were due to the deficiency of aggregate demand, during the war period when price rose very high he explained that inflation was due to excessive aggregate demand. Thus, Keynes put forward what is now called demand-pull theory of inflation.

Demand – Pull Inflation

Thus, according to Keynes, inflation is caused by a situation whereby the pressure of aggregate demand for goods and services exceeds the available supply of output (both begging counted at the prices ruling at the beginning of a period). In such a situ­ation, rise in price level is the natural consequence.

Now, this imbalance between aggregate demand and supply may be the result of more than one force at work. As we know aggregate demand is the sum of consumers’ spending on consumer goods and services, government spending on consumer goods and services and net investment being planned by the entrepreneurs.

But excess of aggregate demand over aggregate supply does not explain persistent rise in prices, year after year. An important factor which feeds inflation is wage-price spiral. Wage-price spiral operates as follows: A rise in prices reduces the real consumption of the wage earners. They will, therefore, press for higher money wages to compensate them for the higher cost of living. Now, an increase in wages, if granted, will raise the prime cost of production and, therefore, entrepreneurs will raise the prices of their products to recover the increment in cost.

This will add fuel to the inflationary fire. A further rise in prices raises the cost of living still further and the workers ask for still higher wages. In this way, wages and prices chase each other and the process of inflationary rise in prices gathers momentum. If unchecked, this may lead to hyper-inflation which signifies a state of affairs where wages and prices chase each other at a very quick speed.

2. Monetarist View:

The Keynesian explanation of demand-pull inflation is important to note that both the original quantity theorists and the modem monetarists, prominent among whom is Milton Friedman, explain inflation in terms of excess demand for goods and services. But there is an important difference between the monetarist view of demand-pull inflation and the Keynesian view of it. Keynes explained inflation as arising out of real sector forces.

In his model of inflation excess demand comes into being as a result of autonomous increase in expenditure on investment and consumption or increase in government expenditure. That is, the increase in aggregate expenditure or demand occurs independent of any increase in the supply of money.

On the other hand, monetarists explain the emergence of excess demand and the resultant rise in prices on account of the increase in money supply in the economy. To quote Milton Friedman, a Nobel Laureate in economics. “Inflation is always and everywhere a monetary phenomenon…… and can be produced only by a more rapid increase in the quantity of money than in output.”

Friedman holds that when money supply is increased in the economy, then there emerges an excess supply of real money balances with the public over their demand for money. This disturbs the monetary equilibrium. In order to restore the equilibrium the public will reduce the money balances by increasing expenditure on goods and services.

Thus, according to Friedman and other modern quantity theorists, the excess supply of real monetary balances results in the increase in aggregate demand for goods and services. If there is no proportionate increase in output, then extra money supply leads to excess demand for goods and services. This causes inflation or rise in prices. Thus, according to monetarists let by Prof. Milton Friedman, excess creation of money supply is the main factor responsible for inflation.

Cost-Push Inflation:

Even when there is no increase in aggregate demand, prices may still rise. This may happen if the costs, particularly the wage costs, increase. Now, as the level of employment increases, the demand for workers rises progressively so that the bargaining position of the workers is enhanced. To exploit this situation, they may ask for an increase in wage rates which are not justi­fiable either on grounds of a prior rise in productivity or cost of living.

The employers in a situation of high demand and employment are more agreeable to concede to these wage claims because they hope to pass on these rises in costs to the consumers in the form of rise in prices. Therefore, when inflation is caused by rise in wages or hike in other input costs such as rise in prices of raw materials, rise in prices of petroleum products, it is called cost-push inflation. If this happens we have another inflationary factor at work.

Besides the increase in wages of labour without any increase in its productivity, or rise in costs of other inputs there is another factor responsible for cost-push inflation. This is the increase in the profit margins by the firms working under monopolistic or oligopolistic conditions and as a result charging higher prices from the consumers. In the former case when the cause of cost-push inflation is the rise in wages it is called wage-push inflation and in the latter case when the cause of cost-push inflation is the rise in profit margins, it is called profit-push inflation.

In addition to the rise in wage rate of labour and increase in profit margin, in the seventies the other cost-push factors (also called supply shocks) causing increase in marginal cost of production became more prominent in bringing about rise in prices. During the seventies, rise in prices of raw materials, especially energy inputs such a hike in crude oil prices made by OPEC resulted in rise in prices of petroleum products.

For example, sharp rise in world oil prices during 1973-75 and again in 1979-80 produced significant cost-push factor which caused inflation not only in Indian but all over the world. Now, in June-August 2004 again the world oil prices have greatly risen. As a result, in India prices of petrol, diesel, cooking gas were raised by petroleum companies. This is tending to raise the rate of inflation.

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In the U.S. and around the world, inflation is high and getting higher

Two years ago, with millions of people out of work and central bankers and politicians striving to lift the U.S. economy out of a pandemic-induced recession , inflation seemed like an afterthought. A year later, with unemployment falling and the inflation rate rising, many of those same policymakers insisted that the price hikes were “transitory” – a consequence of snarled supply chains, labor shortages and other issues that would right themselves sooner rather than later.

Now, with the inflation rate higher than it’s been since the early 1980s, Biden administration officials acknowledge that they  missed their call . According to the latest report from the Bureau of Labor Statistics, the annual inflation rate in May was 8.6%, its highest level since 1981, as measured by the consumer price index . Other  inflation metrics  also have shown significant increases over the past year or so, though not quite to the same extent as the CPI.

With inflation in the United States running at its highest levels in some four decades, Pew Research Center decided to compare the U.S. experience with those of other countries, especially its peers in the developed world. An earlier version of this post was published in November 2021.

The Center relied primarily on data from the Organization for Economic Cooperation and Development (OECD), most of whose 38 member states are highly developed democracies. The OECD collects a  wide range of data  about its members, facilitating cross-national comparisons. We chose to use quarterly inflation measures, both because they’re less volatile than monthly figures and because they were available for all but one OECD country (Costa Rica, which joined the OECD in May 2021). Quarterly inflation data also were available for seven non-OECD countries with sizable national economies, so we included them in the analysis as well.

For each country, we calculated year-over-year inflation rates going back to the first quarter of 2010 and ending in the first quarter of this year. We also calculated how much those rates had risen or fallen since the start of the COVID-19 pandemic in the first quarter of 2020.

To get a sense of longer-term inflation trends in the U.S., we analyzed two measures besides the commonly cited consumer price index: The  Consumer Price Index Retroactive Series  (R-CPI-U-RS) from the Bureau of Labor Statistics, and the  Personal Consumption Expenditures Price Index  from the Bureau of Economic Analysis.

Inflation in the United States was relatively low for so long that, for entire generations of Americans, rapid price hikes may have seemed like a relic of the distant past. Between the start of 1991 and the end of 2019, year-over-year inflation averaged about 2.3% a month, and exceeded 5.0% only four times. Today, Americans rate inflation as the  nation’s top problem , and President Joe Biden has said addressing the problem is his top domestic priority .

But the U.S. is  hardly the only place  where people are experiencing inflationary whiplash. A Pew Research Center analysis of data from 44 advanced economies finds that, in nearly all of them, consumer prices have risen substantially since pre-pandemic times.

In 37 of these 44 nations, the average annual inflation rate in the first quarter of this year was at least twice what it was in the first quarter of 2020, as COVID-19 was beginning its deadly spread. In 16 countries, first-quarter inflation was more than four times the level of two years prior. (For this analysis, we used data from the Organization for Economic Cooperation and Development, a group of mostly highly developed, democratic countries. The data covers 37 of the 38 OECD member nations, plus seven other economically significant countries.)

Among the countries studied, Turkey had by far the highest inflation rate in the first quarter of 2022: an eye-opening 54.8%. Turkey has experienced high inflation for years, but it shot up in late 2021 as the government pursued  unorthodox economic policies , such as cutting interest rates rather than raising them.

The country where inflation has grown  fastest  over the past two years is Israel. The annual inflation rate in Israel had been below 2.0% (and not infrequently negative) every quarter from the start of 2012 through mid-2021; in the first quarter of 2020, the rate was 0.13%. But after a relatively mild recession , Israel’s consumer price index began rising quickly: It averaged 3.36% in the first quarter of this year, more than 25 times the inflation rate in the same period in 2020.

Besides Israel, other countries with very large increases in inflation between 2020 and 2022 include Italy, which saw a nearly twentyfold increase in the first quarter of 2022 compared with two years earlier (from 0.29% to 5.67%); Switzerland, which went from ‑0.13% in the first quarter of 2020 to 2.06% in the same period of this year; and Greece, a country that knows something about economic turbulence . Following the Greek economy’s near-meltdown in the mid-2010s, the country experienced several years of low inflation – including more than one bout of deflation, the last starting during the first spring and summer of the pandemic. Since then, however, prices have rocketed upward: The annual inflation rate in Greece reached 7.44% in this year’s first quarter – nearly 21 times what it was two years earlier (0.36%).

Annual U.S. inflation in the first quarter of this year averaged just below 8.0% – the 13th-highest rate among the 44 countries examined. The first-quarter inflation rate in the U.S. was almost four times its level in 2020’s first quarter.

Regardless of the absolute level of inflation in each country, most show variations on the same basic pattern: relatively low levels before the  COVID-19 pandemic  struck in the first quarter of 2020; flat or falling rates for the rest of that year and into 2021, as many governments sharply curtailed most economic activity; and rising rates starting in mid- to late 2021, as the world struggled to get back to something approaching normal.

But there are exceptions to that general dip-and-surge pattern. In Russia, for instance, inflation rates rose steadily throughout the pandemic period before surging in the wake of its invasion of Ukraine . In Indonesia, inflation fell early in the pandemic and has remained at low levels. Japan has continued its years-long struggle with inflation rates that are too  low . And in Saudi Arabia, the pattern was reversed: The inflation rate surged  during  the pandemic but then fell sharply in late 2021; it’s risen a bit since, but still is just 1.6%.

Inflation doesn’t appear to be done with the developed world just yet. An  interim report  from the OECD found that April’s inflation rate ran ahead of March’s figure in 32 of the group’s 38 member countries.

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Home — Essay Samples — Economics — Inflation — The Rise of Inflation Rate in the Us

The Rise of Inflation Rate in The Us

• Categories: American Government Economic Growth Inflation

About this sample

Words: 1605 |

Published: Jul 15, 2020

Words: 1605 | Pages: 4 | 9 min read

Table of contents

Introduction, financial measures in the us government's inflationary rise, recommedation, what are some factors that contribute to the rise in inflation, how did the inflation affect the market, implementation of additional monetary easing (so-called qe 3), purchase policies of mbs newly decided at fomc in september.

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Inflation: What It Is and How to Control Inflation Rates

What you need to know about the purchasing power of money and how it changes

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What Is Inflation?

Understanding inflation, types of inflation.

• Impact on Prices
• Protecting Your Finances

Types of Price Indexes

• Pros and Cons
• Controlling Inflation
• Deflation and Disinflation

The Bottom Line

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

• Inflation: What It Is and How to Control Inflation Rates CURRENT ARTICLE
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Inflation is a gradual loss of purchasing power that is reflected in a broad rise in prices for goods and services over time. The inflation rate is calculated as the average price increase of a basket of selected goods and services over one year. High inflation means that prices are increasing quickly, while low inflation means that prices are growing more slowly. Inflation can be contrasted with deflation, which occurs when prices decline and purchasing power increases.

Inflation Meaning

Inflation means a rise in prices for goods and services, which results in purchasing power declining over time.

Key Takeaways

• Inflation measures how quickly the prices of goods and services are rising.
• Inflation is classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation.
• The most commonly used inflation indexes are the Consumer Price Index and the Wholesale Price Index.
• Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change.
• Those with tangible assets may like to see some inflation as that raises the value of their assets.

An increase in the money supply is the root of inflation, though this can play out through different mechanisms in the economy. A country’s money supply can be increased by the monetary authorities by:

• Printing and giving away more money to citizens
• Legally devaluing (reducing the value of) the legal tender currency
• Loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market

Other causes of inflation include supply bottlenecks and shortages of key goods, which can push prices to rise.

When inflation occurs, money loses its purchasing power. This can occur across any sector or throughout an entire economy. The expectation of inflation itself can further sustain the devaluation of money. Workers may demand higher wages and businesses may charge higher prices, in anticipation of sustained inflation. This, in turn, reinforces the factors that push prices up.

Melissa Ling © Investopedia, 2019

Inflation can be classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation.

Demand-Pull Effect

Demand-pull inflation occurs when an increase in the supply of money and credit stimulates the overall demand for goods and services to increase more rapidly than the economy’s production capacity. This increases demand and leads to price rises.

When people have more money, it leads to positive consumer sentiment. This, in turn, leads to higher spending, which pulls prices higher. It creates a demand-supply gap with higher demand and less flexible supply, which results in higher prices.

Cost-Push Effect

Cost-push inflation is a result of the increase in prices working through the production process inputs. When additions to the supply of money and credit are channeled into a commodity or other asset markets, costs for all kinds of intermediate goods rise. This is especially evident when there’s a negative economic shock to the supply of key commodities.

These developments lead to higher costs for the finished product or service and work their way into rising consumer prices. For instance, when the money supply is expanded, it creates a speculative boom in oil prices . This means that the cost of energy can rise and contribute to rising consumer prices, which is reflected in various measures of inflation.

Built-In Inflation

Built-in inflation is related to adaptive expectations or the idea that people expect current inflation rates to continue in the future. As the price of goods and services rises, people may expect a continuous rise in the future at a similar rate.

As such, workers may demand more costs or wages to maintain their standard of living. Their increased wages result in a higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice versa.

How Inflation Impacts Prices

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 specified time.

Prices rise, which means that one unit of money buys fewer goods and services. This loss of purchasing power impacts the cost of living for the common public which ultimately leads to a deceleration in economic growth. The consensus view among economists is that sustained inflation occurs when a nation’s money supply growth outpaces economic growth.

The increase in the Consumer Price Index for All Urban Consumers (CPI-U) over the 12 months ending July 2024 on an unadjusted basis. Prices increased by 0.2% on a seasonally adjusted basis in July 2024 from the previous month.

To combat this, the monetary authority (in most cases, the central bank ) takes the necessary steps to manage the money supply and credit to keep inflation within permissible limits and keep the economy running smoothly.

Theoretically, monetarism is a popular theory that explains the relationship between inflation and the money supply of an economy. For example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and silver flowed into the Spanish and other European economies. Since the money supply rapidly increased, the value of money fell, contributing to rapidly rising prices.

Inflation is measured in a variety of ways depending on the types of goods and services. It is the opposite of deflation , which indicates a general decline in prices when the inflation rate falls below 0%. Keep in mind that deflation shouldn’t be confused with disinflation , which is a related term referring to a slowing down in the (positive) rate of inflation.

Julie Bang / Investopedia

How to Protect Your Finances During Inflation

There are a range of measures that individuals can take to protect their finances against inflation. For instance, one may choose to invest in asset classes that outperform the market during inflationary times. This might include commodities like grain, beef, oil, electricity, and natural gas.

Commodity prices typically stay one step ahead of product prices, and price increases for commodities are often seen as an indicator of inflation to come. Commodities, which can also be volatile, are easily affected by natural disasters, geopolitics, or conflict.

Real estate income may also help buffer against inflation, as landlords can increase their rent to keep pace with the rise of prices overall.

The U.S. government also offers Treasury Inflation-Protected Securities (TIPS) , a type of security indexed to inflation to protect against declines in purchasing power.

Depending upon the selected set of goods and services used, multiple types of baskets of goods are calculated and tracked as price indexes. The most commonly used price indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) .

The CPI is a measure that examines the weighted average of prices of a basket of goods and services that are of primary consumer needs. They include transportation, food, and medical care.

CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket. The prices in consideration are the retail prices of each item, as available for purchase by the individual citizens. CPI can impact the value of one currency against those of other nations.

Changes in the CPI are used to assess price changes associated with the cost of living , making it one of the most frequently used statistics for identifying periods of inflation or deflation. In the United States, the Bureau of Labor Statistics (BLS) reports the CPI each month and has calculated it as far back as 1913.

The CPI-U, which was introduced in 1978, represents the buying habits of approximately 88% of the noninstitutional population of the United States.

Wholesale Price Index (WPI)

The WPI is another popular measure of inflation. It measures and tracks the changes in the price of goods in the stages before the retail level.

While WPI items vary from one country to another, they mostly include items at the producer or wholesale level. For example, it includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and cotton clothing.

Although many countries and organizations use the WPI, many other countries, including the U.S., use a similar variant called the Producer Price Index (PPI) .

Producer Price Index (PPI)

The PPI is a family of indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time. The PPI measures price changes from the perspective of the seller and differs from the CPI, which measures price changes from the perspective of the buyer.

In all variants, the rise in the price of one component (say oil) may cancel out the price decline in another (say wheat) to a certain extent. Overall, each index represents the average weighted price change for the given constituents which may apply at the overall economy , sector, or commodity level.

The Formula for Measuring Inflation

The above-mentioned variants of price indexes can be used to calculate the value of inflation between two particular months (or years). While a lot of ready-made inflation calculators are already available on various financial portals and websites, it is always better to be aware of the underlying methodology to ensure accuracy with a clear understanding of the calculations. Mathematically,

Percent Inflation Rate = (Final CPI Index Value ÷ Initial CPI Value) × 100

Say you wish to know how the purchasing power of $10,000 changed between January 1975 and January 2024. One can find price index data on various portals in a tabular form. From that table, pick up the corresponding CPI figures for the given two months. For September 1975, it was 52.1 (initial CPI value), and for January 2024, it was 308.417 (final CPI value).

Plugging in the formula yields:

Percent Inflation Rate = (308.417 ÷ 52.1) × 100 = (5.9197) × 100 = 591.97%

Since you wish to know how much $10,000 from January 1975 would be worth in January 2024, multiply the inflation rate by the amount to get the changed dollar value:

Change in Dollar Value = 5.9197 × $10,000 = $59,197

This means that $10,000 in January 1975 will be worth $59,197 today. Essentially, if you purchased a basket of goods and services (as included in the CPI definition) worth $10,000 in 1975, the same basket would cost you $59,197 in January 2024.

Advantages and Disadvantages of Inflation

Inflation can be construed as either a good or a bad thing, depending upon which side one takes, and how rapidly the change occurs.

Individuals with tangible assets (like property or stocked commodities) priced in their home currency may like to see some inflation as that raises the price of their assets, which they can sell at a higher rate.

Inflation often leads to speculation by businesses in risky projects and by individuals who invest in company stocks because they expect better returns than inflation.

An optimum level of inflation is often promoted to encourage spending to a certain extent instead of saving. If the purchasing power of money falls over time, there may be a greater incentive to spend now instead of saving and spending later. It may increase spending, which may boost economic activities in a country. A balanced approach is thought to keep the inflation value in an optimum and desirable range.

Disadvantages

Buyers of such assets may not be happy with inflation, as they will be required to shell out more money. People who hold assets valued in their home currency, such as cash or bonds, may not like inflation, as it erodes the real value of their holdings.

As such, investors looking to protect their portfolios from inflation should consider inflation-hedged asset classes, such as gold, commodities, and real estate investment trusts (REITs). Inflation-indexed bonds are another popular option for investors to profit from inflation .

High and variable rates of inflation can impose major costs on an economy. Businesses, workers, and consumers must all account for the effects of generally rising prices in their buying, selling, and planning decisions.

This introduces an additional source of uncertainty into the economy, because they may guess wrong about the rate of future inflation. Time and resources expended on researching, estimating, and adjusting economic behavior are expected to rise to the general level of prices. That’s opposed to real economic fundamentals, which inevitably represent a cost to the economy as a whole.

Even a low, stable, and easily predictable rate of inflation, which some consider otherwise optimal, may lead to serious problems in the economy. That’s because of how, where, and when the new money enters the economy.

Whenever new money and credit enter the economy, it is always in the hands of specific individuals or business firms. The process of price level adjustments to the new money supply proceeds as they then spend the new money and it circulates from hand to hand and account to account through the economy.

Inflation does drive up some prices first and drives up other prices later. This sequential change in purchasing power and prices (known as the Cantillon effect) means that the process of inflation not only increases the general price level over time but also distorts relative prices , wages, and rates of return along the way.

Economists, in general, understand that distortions of relative prices away from their economic equilibrium are not good for the economy, and Austrian economists even believe this process to be a major driver of cycles of recession in the economy.

Leads to higher resale value of assets

Optimum levels of inflation encourage spending

Buyers have to pay more for products and services

Imposes higher prices on the economy

Drives some prices up first and others later

How Inflation Can Be Controlled

A country’s financial regulator shoulders the important responsibility of keeping inflation in check. It is done by implementing measures through monetary policy , which refers to the actions of a central bank or other committees that determine the size and rate of growth of the money supply.

In the U.S., the Fed’s monetary policy goals include moderate long-term interest rates, price stability, and maximum employment. Each of these goals is intended to promote a stable financial environment. The Federal Reserve clearly communicates long-term inflation goals in order to keep a steady long-term rate of inflation , which is thought to be beneficial to the economy.

Price stability or a relatively constant level of inflation allows businesses to plan for the future since they know what to expect. The Fed believes that this will promote maximum employment, which is determined by non-monetary factors that fluctuate over time and are therefore subject to change.

For this reason, the Fed doesn’t set a specific goal for maximum employment, and it is largely determined by employers’ assessments. Maximum employment does not mean zero unemployment, as at any given time there is a certain level of volatility as people vacate and start new jobs.

Hyperinflation is often described as a period of inflation of 50% or more per month.

Monetary authorities also take exceptional measures in extreme conditions of the economy. For instance, following the 2008 financial crisis, the U.S. Fed kept the interest rates near zero and pursued a bond-buying program called quantitative easing (QE) .

Some critics of the program alleged it would cause a spike in inflation in the U.S. dollar, but inflation peaked in 2007 and declined steadily over the next eight years. There are many complex reasons why QE didn’t lead to inflation or hyperinflation , though the simplest explanation is that the recession itself was a very prominent deflationary environment, and quantitative easing supported its effects.

Consequently, U.S. policymakers have attempted to keep inflation steady at around 2% per year. The European Central Bank (ECB) has also pursued aggressive quantitative easing to counter deflation in the eurozone, and some places have experienced negative interest rates . That’s due to fears that deflation could take hold in the eurozone and lead to economic stagnation.

Moreover, countries that experience higher rates of growth can absorb higher rates of inflation. India’s target is around 4% (with an upper tolerance of 6% and a lower tolerance of 2%), while Brazil aims for 3.25% (with an upper tolerance of 4.75% and a lower tolerance of 1.75%).

Meaning of Inflation, Deflation, and Disinflation

While a high inflation rate means that prices are increasing, a low inflation rate does not mean that prices are falling. Counterintuitively, when the inflation rate falls, prices are still increasing, but at a slower rate than before. When the inflation rate falls (but remains positive), this is known as disinflation .

Conversely, if the inflation rate becomes negative, that means that prices are falling. This is known as deflation , which can have negative effects on an economy. Because buying power increases over time, consumers have less incentive to spend money in the short term, resulting in falling economic activity.

Hedging Against Inflation

Stocks are considered to be the best hedge against inflation , as the rise in stock prices is inclusive of the effects of inflation. Since additions to the money supply in virtually all modern economies occur as bank credit injections through the financial system, much of the immediate effect on prices happens in financial assets that are priced in their home currency, such as stocks.

Special financial instruments exist that one can use to safeguard investments against inflation. They include Treasury Inflation-Protected Securities (TIPS) , a low-risk treasury security that is indexed to inflation where the principal amount invested is increased by the percentage of inflation.

One can also opt for a TIPS mutual fund or TIPS-based exchange-traded fund (ETF) . To get access to stocks, ETFs, and other funds that can help avoid the dangers of inflation, you’ll likely need a brokerage account. Choosing a stockbroker can be a tedious process due to the variety among them.

Gold is also considered to be a hedge against inflation, although this doesn’t always appear to be the case looking backward.

Examples of Inflation

Since all world currencies are fiat money , the money supply could increase rapidly for political reasons, resulting in rapid price level increases. The most famous example is the hyperinflation that struck the German Weimar Republic in the early 1920s.

The nations that were victorious in World War I demanded reparations from Germany, which could not be paid in German paper currency, as this was of suspect value due to government borrowing. Germany attempted to print paper notes, buy foreign currency with them, and use that to pay their debts.

This policy led to the rapid devaluation of the German mark along with the hyperinflation that accompanied the development. German consumers responded to the cycle by trying to spend their money as fast as possible, understanding that it would be worth less and less the longer they waited. More money flooded the economy, and its value plummeted to the point where people would paper their walls with practically worthless bills. Similar situations occurred in Peru in 1990 and in Zimbabwe between 2007 and 2008.

What Causes Inflation?

There are three main causes of inflation: demand-pull inflation, cost-push inflation, and built-in inflation.

• Demand-pull inflation refers to situations where there are not enough products or services being produced to keep up with demand, causing their prices to increase.
• Cost-push inflation, on the other hand, occurs when the cost of producing products and services rises, forcing businesses to raise their prices.
• Built-in inflation (which is sometimes referred to as a wage-price spiral) occurs when workers demand higher wages to keep up with rising living costs. This, in turn, causes businesses to raise their prices in order to offset their rising wage costs, leading to a self-reinforcing loop of wage and price increases.

Is Inflation Good or Bad?

Too much inflation is generally considered bad for an economy, while too little inflation is also considered harmful. Many economists advocate for a middle ground of low to moderate inflation, of around 2% per year.

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.

What Are the Effects of Inflation?

Inflation can affect the economy in several ways. For example, if inflation causes a nation’s currency to decline, this can benefit exporters by making their goods more affordable when priced in the currency of foreign nations.

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.

Why Is Inflation So High as of 2024?

In 2022, inflation rates around the world rose to their highest levels since the early 1980s. While there is no single reason for this rapid rise in global prices, a series of events worked together to boost inflation to such high levels.

The COVID-19 pandemic led to lockdowns and other restrictions that greatly disrupted global supply chains, from factory closures to bottlenecks at maritime ports. Governments also issued stimulus checks and increased unemployment benefits to counter the financial impact on individuals and small businesses. When vaccines became widespread and the economy bounced back, demand (fueled in part by stimulus money and low interest rates) quickly outpaced supply, which struggled to get back to pre-COVID levels.

Russia’s unprovoked invasion of Ukraine in early 2022 led to economic sanctions and trade restrictions on Russia, limiting the world’s supply of oil and gas since Russia is a large producer of fossil fuels. Food prices also rose as Ukraine’s large grain harvests could not be exported. As fuel and food prices rose, it led to similar increases down the value chains. The Fed raised interest rates to combat the high inflation, which significantly came down in 2023, though it remains above pre-pandemic levels .

Inflation is a rise in prices, which results in the decline of purchasing power over time. Inflation is natural and the U.S. government targets an annual inflation rate of 2%; however, inflation can be dangerous when it increases too much, too fast.

Inflation makes items more expensive, especially if wages do not rise by the same levels of inflation. Additionally, inflation erodes the value of some assets, especially cash. Governments and central banks seek to control inflation through monetary policy.

U.S. Bureau of Labor Statistics. “ Consumer Price Index .”

Edo, Anthony, and Melitz, Jacques. “ The Primary Cause of European Inflation in 1500–1700: Precious Metals or Population? The English Evidence .” CEPII Working Paper, October 2019, pp. 13-14. Download PDF.

U.S. Bureau of Labor Statistics. “ Chapter 17. The Consumer Price Index (Updated 2-14-2018) ,” Page 2.

U.S. Bureau of Labor Statistics. “ Consumer Price Index Chronology .”

U.S. Bureau of Labor Statistics. “ Producer Price Index Frequently Asked Questions (FAQs) ,” select “4. How does the Producer Price Index differ from the Consumer Price Index?”

U.S. Bureau of Labor Statistics. “ Producer Price Index Frequently Asked Questions (FAQs) ,” select “3. When did the Wholesale Price Index become the Producer Price Index?”

U.S. Bureau of Labor Statistics. “ Producer Price Indexes .”

U.S. Bureau of Labor Statistics. “ Consumer Price Index Historical Tables for U.S. City Average .”

U.S. Bureau of Labor Statistics. “ Historical CPI-U ,” Page 3.

Adam Smith Institute. “ The Cantillion Effect .”

Foundation for Economic Education. “ The Current Economic Crisis and the Austrian Theory of the Business Cycle .”

Board of Governors of the Federal Reserve System. “ Review of Monetary Policy Strategy, Tools, and Communication .”

Board of Governors of the Federal Reserve System. “ What Is the Lowest Level of Unemployment That the U.S. Economy Can Sustain? ”

Fischer, Stanley et al. “ Modern Hyper- and High Inflations .” Journal of Economic Literature , vol. 40, no. 3, September 2002, pp. 837.

Federal Reserve History. “ The Great Recession and Its Aftermath .”

Federal Reserve Bank of New York. “ Liberty Street Economics: Ten Years Later—Did QE Work? ”

Congressional Budget Office. “ How the Federal Reserve’s Quantitative Easing Affects the Federal Budget .”

Board of Governors of the Federal Reserve System. “ FAQs: Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run? ”

European Central Bank. “ How Quantitative Easing Works .”

Reserve Bank of India. “ Monetary Policy ,” select “The Monetary Policy Framework.”

Central Bank of Brazil. “ Inflation Targeting Track Record .”

TreasuryDirect. “ Treasury Inflation-Protected Securities (TIPS) .”

University of Illinois, Urbana-Champaign. “ 1920s Hyperinflation in Germany and Bank Notes .”

Rossini, Renzo (Editors Alejandro M. Werner and Alejandro Santos). “ Staying the Course of Economic Success: Chapter 2. Peru’s Recent Economic History: From Stagnation, Disarray, and Mismanagement to Growth, Stability, and Quality Policies .” International Monetary Fund eLibrary, September 2015.

Kramarenko, Vitaliy et al. “ Zimbabwe: Challenges and Policy Options After Hyperinflation .” International Monetary Fund , June 2010, no. 6.

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Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis. “ Consumer Price Index for All Urban Consumers: All Items in U.S. City Average .”

Board of Governors of the Federal Reserve System. “ Open Market Operations .”

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122 Inflation Essay Topic Ideas & Examples

🏆 best inflation topic ideas & essay examples, 👍 good essay topics on inflation, ⭐ simple & easy inflation essay titles, 💡 interesting topics to write about inflation.

• Evaluate Government Policies to Reduce the Rate of Inflation The rate of inflation is the adjustment in the index of price in a single year to a new one expressed in percentages.
• The Relationship Between Money Supply and Inflation It is evidenced that changing the money supply through the central banks leads to a control of the inflationary situations in the same economy.
• The Price Deviations and Inflation Rates As seen from the table, the price deviations and inflation rates vary significantly depending on the item, season, and any global events that affect the economy.
• The Economic Disparity and Inflation It is essential to emphasize that the economic consequences of the pandemic are severe and are due in the main to inflation.
• US Economy: Navigating Debt, Inflation, and Recession Risks Today, the US is the world’s largest debtor and also the largest economy, market, and investor. Household debt can become a severe problem for the economy if exceeds their dead and accumulated wealth.
• Unemployment Rate: Impact on GDP and Inflation In such a way, the scenario shows it is vital to preserve the balance and avoid decisions focusing on only one aspect of the economy.
• The Inflation Dynamics in the Canadian Context According to the report, the economy only functions well when inflation is stable and predictable and is in an unhealthy state otherwise.inflation has been stable in the country over the last 25 years because of […]
• “Expected and Realized Inflation…” by Binder & Kamdar At the same time, the key focus of adaptive expectations is on the past rates of realized inflation and the factors that caused it.
• Inflation at the International Monetary Fund Anchoring inflation expectations, which is a condition in which inflation is regarded near the Central Bank target and typically matches what consumers anticipate, is one of the other possible measures. The pandemic appears to be […]
• How the Federal Reserve Controls Inflation According to the author of the article, the crisis became the impetus for developing new strategies for controlling the level of inflation.
• Inflation: Types and Negative Effects The mentioned type of inflation can stimulate the economy and increase demand for jobs, but at the same time, it raises the prices and is usually more expensive than cost-push inflation.
• Fiscal Policy and Inflation in Canada According to the report, in order to protect the country from the long-lasting consequences of the COVID-19 pandemic and the recently emerged effects of the Russian-Ukraine war, Canadian policy-makers implemented fiscal policies, but their efficacy […]
• Walmart Has Been Negatively Impacted by Inflation The employment issues caused by the pandemic and increased prices for goods handling forced the company to consider the option of automation for business processes.
• “Inflation Hits the Fastest Pace Since 1981, at 8.5% Through March” by Koeze Further on, the predictions reveal that the inflation rate is expected to stabilize due to a decrease in the price of used cars and apparel.
• Inflation Rates and the Value of the Dollar Projected Social Security benefits at the retirement age of 65 years are 48,580 The current age is 25 years Retirement age is 65 years =40 years The annual inflation rate is at 3% Utilizing the […]
• Inflation and High-Interest Rates When a company borrows in a country with higher interest rates, the risk of inflation and currency depreciation grows, but the debt of this company is the same.
• Inflation’s Impact on Fixed Income By taking a diversified approach to fixed income investing, investors can better manage the risks associated with interest rates as well as inflation and increase the yield in their bond portfolios.
• How Economic Crises Affect Inflation Beliefs A feature of the article is the study by the authors of the consequences of inflationary crises and comparison with pre-existing crises to calculate the level of the crisis as a whole.
• Inflation: What Is It and Inflation in the USA Inflation is an increase in the general price level of goods, works, and services of the country’s population and businesses or an extended period. This kind of inflation is considered the best because it occurs […]
• Inflation Crisis in China for Financial Managers As a financial manager running my company, the rise in prices of commodities will decrease the purchasing power of the foreign currency used by investors and potential customers across the globe.
• Unemployment and Inflation Relation However, the level of unemployment and its prevailing types can differ significantly depending on the state of the economies of countries and the policies they use to combat unemployment.
• Unanticipated and Participated Inflation The first inflation outcome refers to income recipients hurt by inflation as there is a forcible price level increase that does not coincide with their income increase proportionally.
• Interest Rate and Inflation Impact on Exchange Rate The second observation point to be made pertains to the differences in the exchange rate of NZDUSD among the two viable.
• Inflation and Deflation Effects on the US and Saudi Stock Markets Inflation is traditionally defined as a consistent rise in the price rates within a specific industry or in the entire economy of the state, which is triggered by a rapid increase in demand: “Inflation is […]
• Treasury Inflation-Protected Security Refers This ensures that the real rate of interest is determined beforehand, and it adjusts automatically to the increase in the inflation rate.
• Significance of Inflation to Corporate Finance The argument goes on that with elevated inflation rates, there is always a chance to cut down on interest rates as compared to instances when the inflation rates are low and interest rates need to […]
• UAE and GCC Economic Analysis: Inflation and Unemployment This is explained by the fact that UAE is less dependent on oil trade, hence, the inflation and unemployment rate in the UAE is lower in comparison with the countries of GCC.
• Government Spending Stimulation in the Fight Against Inflation The equilibrium point is a point where the value of is money adjusted thereby creating an equilibrium in the quantity of money supplied and that of the quantity of money demanded.
• Inflation in the US Business Industry Inflation can be measured in the following ways; Monetary inflation; caused by increase in the increase in the amount of money in circulation in an economy.
• Gasoline Prices, Rates of Unemployment, Inflation, and Economic Growth The data which has been queried from the database are related to gasoline prices in California, the unemployment rate in the US, the inflation rate in the US, and Real GDP.
• Federal Reserve System: Inflation The article ‘Inflation and the Federal Reserve’ by Richard Cook; this source can be used to describe the central threat of inflation and identify the principal steps to be developed by central banks, government, and […]
• “Inflation Rise Hits US Consumers” BBC Article The main focus of the article’s concern is the inflation rise that US economics experiences now and the impact it has on US consumer spending.
• Inflation Dynamics: Mistakes in the Forecaster’s Behavior In this case, the authors of the article pay attention to the evaluation of the Phillips curve and understanding its advantages and drawbacks.
• Increasing Inflation Impact on Individuals In simpler terms, inflation is the rise in the cost of living due to an exaggerated increase in commodity prices. This is because the rate of savings will be lower than the inflation resulting in […]
• Saudi Arabia and Inflation: Past, Present, Future What is the role of the Saudi Central Bank about inflation? What is the historical inflation trend in Saudi?
• Inflation Expectations: Households and Forecasters The New Keynesian formula that the authors of the paper were trying to create, in its turn was supposed to provide justification for the lack of forecast efficacy in determining the changes in inflation rates, […]
• Asset Bubbles and Policy Response: A Historical View In the 1990s and the early years of the 21st century, the federal reserve policy makers opted to adopt the mop-up-after strategy-policy of letting the bubbles burst and then mopping up there after.
• Inflation Tradeoffs and the Phillips Curve In the findings, Lucas concluded that the there is a direct relationship and variance in the tradeoff between full employment and inflation rate at a particular level of input in the countries studied.
• Inflation and Unemployment in the United States In the 21st century, there are so many issues in the economy of the United States. This is increasing the demand for skilled workers by the day as opposed to the unskilled.
• Unemployment and Inflation Issues In most cases, if one is suffering structural unemployment, it is as a result of improvement in a certain area, or a change in the way things are done.
• Fluctuations in Inflation and Employment Debate surrounded what is termed the multiplier effect: are they higher for tax cuts or government spending, the differences in multiplier effect from different tax cuts, Incentive impact from tax cuts.
• Inflation Causes: Structuralism and Monetarism One of the features of this kind of inflation is a rapid rise in the price level with the currency loosing its value.
• The Effects of Inflation Targeting In theory inflation targeting is straightforward: the impending rate of inflation is predicted by the central bank, later on it is juxtaposed with the target rates which the government considers as appropriate for the economy […]
• The Euro Zone’s Rising Inflation and Unemployment Rate However, the euro zone found itself in a predicament from late 2009 after the economic downturns that faced some countries in the euro zone.
• Inflation Tax – Printing More Money to Cover the War Expenses The subsequent encroachment of inflation diminishes the value of money hence even if people had more money, the value of their cash was meaningless, a phenomenon similar to tax collection, which reduces the total amount […]
• Economic Condition of Singapore: Inflation Hits 5.2% in March Some of the effects of high inflation rate that has been felt in the economy are the increase of the housing prices, and cost of fuel increased by approximately 5%, thereby increasing the cost of […]
• Inflation in the United Kingdom According to the Bank of England, inflation occurs when the demand exceeds the ability by the economy’s capacity to produce goods and services.
• Effect of a Permanent Increase in Oil Price on Inflation and Output During the same year, the alterations in the price of oil were activated by a change in the supply of the same commodity in the market place.
• Consumer Price Index: Measuring Inflation In this case, the volumes of money being circulated exceeds the supply of goods and services in the same market thus leading to an upward adjustment of prices in order to absorb the extra monies […]
• The Cause of China’s Inflation The supply is affected by the increase of prices of food in the global market, whereby, the Chinese government finds it difficult to satisfy the food demand of the increasing population of the Chinese population.
• The Current Impact of Inflation and Unemployment on Germany’s Political/Economic System It is notable to recognize the fact that the rate of savings in the nation is quite high causing a dip in the rate of inflation.
• Problem of China’s Inflation With the increase in oil prices, energy costs have increased, and this has resulted into an increase in the prices of products manufactured in the industries. In 2009 the government made a policy to increase […]
• Inflation in Saudi Arabia This paper, using the quarterly data from 1980 to 2010, examines the causes behind the inflation in Saudi, its effects, and the effectiveness of the counter-strategies and policies the Saudi government has put in place […]
• Inflation Rates in Sweden The recession of the early 1990s was largely responsible for the drop in inflation rates. As per the theoretical model of money supply and inflation, increases in money supply will lead to inflationary pressures.
• Current News of Economics: The Global Inflation Inflation has affected the total demand for goods and services in the economy, thus exceeding the supply. This means that you would have to pay more for the same amount of goods and services you […]
• Analysis of Unemployment and Inflation in the United States This was at the height of the recession that continues to grapple the country with major negative implications in the economy.
• GDP, Unemployment, Inflation, and Economic Growth
• Absolute and Relative Anti-Inflation Reputation: Evidence From the Bond Markets
• World Inflation and Monetary Accommodation in Eight Countries
• Can Demography Improve Inflation Forecasts? The Case of Sweden
• Accounting for Post-Crisis Inflation and Employment: A Retro Analysis
• Unravelling India’s Inflation and Policy Puzzles
• Inflation and Financial Market Performance: What Have We Learned in the Past Ten Years?
• Administered Inflation and Business Pricing: Another Look
• The Historical Relationship Between Inflation and Political Rebellion: What It Might Teach Us About Neoliberalism
• America’s Only Peacetime Inflation: The 1970s
• Sectoral Inflation and the Phillips Curve: What Has Changed Since the Great Recession?
• Analyzing the Relationship Between Inflation Rate and Per Capita GDP Growth
• Banks, Lies, and Bricks: The Determinants of Home Value Inflation in Spain During the Housing Boom
• Capacity Utilization and Unemployment Rates: Are They Complements or Substitutes?
• Fast vs. Gradual Policies to Control Inflation
• Bond Market Inflation Expectations in Industrial Countries: Historical Comparisons
• Inflation and Monetary Velocity in Latin America
• What Drives the Relationship Between Inflation and Price Dispersion: Market Power vs. Price Rigidity
• How Much Did Speculation Contribute to the Recent Food Price Inflation?
• MAPI: Model for Analysis and Projection of Inflation in France
• Budget Deficit, Inflation, and Debt Sustainability: Evidence From Turkey
• Monetarism: Printing Money to Curb Inflation
• Capacity Constraints, Inflation, and the Transmission Mechanism: Forward-Looking vs. Myopic Policy Rules
• When Did Inflation Expectations in the Euro Area De-Anchor?
• Capturing the Link Between M3 Growth and Inflation in the Euro Zone
• Implementing Monetary Cooperation Through Inflation Targeting
• German Great Inflation: Summary & Analysis
• The Maastricht Inflation Criterion: On the Effect of the European Union Expansion
• What Unemployment Rates Tell Us About the Future Inflation
• Applying Foreign Exchange Interventions as an Additional Instrument Under Inflation Targeting: The Case of Ukraine
• China’s Economic Slowdown and International Inflation Dynamics
• The Impact of Inflation Targeting on the Real Economy of Developing and Emerging Countries
• Effects of Inflation on Business: The Good and the Bad
• U.S. Inflation Dynamics: What Drives Them Over Different Frequencies
• Structural Inflation and the 1994 ‘Monetary’ Crisis in China
• Macroeconomic Aggregate Model for Analysis of Inflation and Stabilization of the Russian Economy
• Cyclical vs. Acyclical Inflation: A Deeper Dive
• The Inflation-Output Nexus: Empirical Evidence From India, Brazil, and South Africa
• Forecasting Inflation Using Constant Gain Least Squares
• Stopping Hyperinflation: Lessons From the German Inflation Experience of the 1920s
• Modeling and Forecasting Inflation in Japan
• Globalization and Inflation Dynamics: The Impact of Increased Competition
• The Relationship Between Inflation and Economic Growth: A Multi-Country Empirical Analysis
• How Does Monetary Policy Influence Inflation and Employment?
• Assessing the Gap Between Observed and Perceived Inflation in the Euro Area
• Unanticipated Inflation, Devaluation, and Output in Latin America
• Inflation and Economic Growth Nexus in BRICS: Evidence From ARDL Bound Testing Approach
• Bootstrapping Covariate Unit Root Tests: An Application to Inflation Rates
• Fiscal Dominance and Inflation Targeting: Lessons From Brazil
• Inflation and the Gig Economy: E-Tailing and Self-Employment Rise in Disrupting the Phillips Curve
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• Introduction

Four theories of inflation, summarized

1. the quantity theory of money, 2. the demand-pull theory.

• 3. The cost-push theory
• 4. The structural theory
• The bottom line

Inflation refers to the general increase in prices or the money supply , both of which can cause the purchasing power of a currency to decline.

From a consumer’s point of view, inflation is often perceived in relation to prices . We call it “inflation” when consumer goods and services across a wide segment of the economy are rising in cost. From a theoretical perspective, however, there are several ways to define inflation and the factors that cause it .

(Read Milton Friedman’s Britannica entry on money.)

Four prevailing economic theories aim to define and explain inflation:

• The quantity theory of money argues that inflation is determined by the money supply. An increase in the amount of money in circulation will directly cause a proportional increase in the price of goods and services over time.
• The demand-pull theory of inflation suggests that the cost of goods and services rises when demand is greater than the available supply . This model of supply/demand imbalance reflects one of the most common definitions of inflation: “Too much money chasing too few goods.”
• The cost-push theory attributes inflation to the rising cost of production—whether raw materials or wages—amid a steady flow in demand. An increase in these “input costs” will likely decrease a manufacturer’s bottom line . To compensate, some manufacturers may decide to transfer these extra costs to the consumer by charging higher prices for the same unit of goods.
• The structural theory of inflation describes a type of inflation that often prevails in developing countries . It says inflation is caused by “structural” weakness in a country’s capacity to produce goods or maintain an adequate flow of supply. Poor infrastructure, outdated technologies, or inefficient supply chains can contribute to general underproductivity, creating imbalances between supply and demand. Inflation that stems from structural issues may not be easily changed by monetary policy.

Let’s look at each inflation theory in more detail.

Thesis: Inflation is determined by the money supply.

As the first and oldest of the inflation theories, the quantity theory of money views inflation as primarily a “monetary” occurrence. In other words, the influence of the amount of money in the economy takes precedence over all other factors, including income levels, demand for goods, and frequency of spending (aka, the velocity of circulation or velocity of money).

Although these other factors may fluctuate in the near term, over time and on average, their changes may not be consequential enough to drive up prices in any significant manner. Dramatic increases in the money supply, however, can cause a notable shift in prices. For example, if the money supply doubles, according to the theory, price levels are expected also to double. Inflation, therefore, is first and foremost a monetary matter.

The quantity theory was originally formulated in 1517 by mathematician Nicolaus Copernicus , revived in the 18th century by a number of philosophers—particularly David Hume —and refined in the 1950s and ’60s by a group of economists at the University of Chicago , led by Milton Friedman .

Why was it “refined” in the middle half of the 20th century by Friedman and his fellow “Chicago School” colleagues? The quantity theory ran into a few major bumps between World Wars I and II—particularly during the Great Depression of the 1930s. The theory assumes that a nation is at or near full employment. Its productive capacity, therefore, would be running at an optimal level. During the Great Depression, the lack of employment opportunities brought national production to crippling levels.

Although a shift toward a Keynesian approach to economic policy (see below) is largely credited for pulling the U.S. economy out of its Depression-era slump, culminating in the production boom during World War II , Milton Friedman and the Chicago school revisited the basic tenets of quantity theory in the decades that followed.

They agreed that short-term changes in the money supply may not be very effective in controlling short-term movements in the economy. However, they contended, changes in the money supply can cause longer-term changes in income, frequency of consumer spending , and eventually, the prices of goods and services. Therefore, to achieve price stability in the long term, it may be necessary to increase the money supply on a regular basis, and at a rate equal to that of an economy’s estimated expansion .

Not all economists agree with this view. Many argue that in highly developed economies, the demand for goods and higher wages takes precedence over the money supply. In other words, consumer demand and the need for spending are what support the case for increasing the money supply; increasing the money supply alone will not increase demand or consumption . And if rising demand outpaces available supply, the velocity of money will increase—if not through actual “cash” transactions, then through credit expansion.

Thesis: The cost of goods and services rises when demand is greater than the available supply.

This second basic approach to inflation, a key tenet of John Maynard Keynes ’s theory of economics , claims that aggregate demand influences output and inflation. One of Keynes’s aims was to devise a way in which an economy can pull itself out of a recession .

Keynes believed that increasing aggregate demand and expenditure is key to boosting economic growth . But how does a country stimulate demand? According to Keynes’s theory, the government needs to spend money in order to get money flowing in the economy. This has usually taken the form of government infrastructure projects to boost employment (although there are other variations of economic stimulus that governments have implemented, such as the cash payments sent directly to American households during the COVID-19 pandemic). Newly generated income (from jobs or cash stimulus) can boost demand for consumer goods, which can increase spending and consumption.

Keynes also believed that interest rates—essentially the cost of borrowing money —can significantly affect both consumption and investment on a private and corporate level. Lower interest rates tend to encourage spending and business investment, which also stimulates the velocity of money. Higher interest, on the other hand, tends to have the opposite effect, encouraging savings over consumption.

Eventually, the increase in aggregate demand may surpass aggregate supply, causing prices to rise. In other words, when consumer demand increases amid limited supply, prices tend to be bid (or “pulled”) higher. Hence, the term “demand-pull” inflation.

The Keynesian approach and all its variations are significant because they give governments a framework to influence the economic cycle through fiscal policy. Keynesian economics has dominated the economic policies of many industrialized countries since the mid-20th century. Still, Keynes’s approach does not eliminate all uncertainties. For example, there’s a time lag between fiscal and (central bank) monetary policy actions and their effects on demand and consumption. Nevertheless, many economists believe the Keynesian approach has led to better control over short-term changes in employment and real income.

The big caveat to Keynes’s approach emerged in the period following WWII until the end of the 1970s. It had no viable response to “stagflation,” in which high inflation coincided with slow economic growth.

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Essay on Inflation | Inflation Essay for Students and Children in English

February 14, 2024 by sastry

Essay on Inflation:  A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation is called Inflation. Although inflation is a part of the normal economic phenomena of any country, any increase in inflation above a pre-determined level is a cause of concern. The causes of inflation are many. While it is -often cited that a drop in India’s agricultural output lead to the decline in supply, figures tell a different story.

You can read more  Essay Writing  about articles, events, people, sports, technology many more.

Long and Short Essays on Inflation for Kids and Students in English

Given below are two essays in English for students and children about the topic of ‘Inflation’ in both long and short form. The first essay is a long essay on Inflation of 400-500 words. This long essay about Inflation is suitable for students of class 7, 8, 9 and 10, and also for competitive exam aspirants. The second essay is a short essay on Inflation of 150-200 words. These are suitable for students and children in class 6 and below.

Long Essay on Inflation 400 Words in English

Below we have given a long essay on Inflation of 500 words is helpful for classes 7, 8, 9 and 10 and Competitive Exam Aspirants. This long essay on the topic is suitable for students of class 7 to class 10, and also for competitive exam aspirants.

India’s food production crossed 235 million tonnes during years 2010-11 as per the latest estimates and this is the highest since Independence. The previous highest production, at nearly 233 million tonnes, was achieved in years 2008-09. Agriculture recorded a 5.4% growth in years 2010-11 compared to the 4% growth achieved all these years, according to S Ayyappan, Director-General of the Indian Council of Agricultural Research.

However, inflation reflects overheating: the supply capacity of the economy is simply unable to match the demands on that capacity. Moreover, purchasing power of consumers is increasing and hence demand is accelerating. Minimum Support Prices (MSPs) for agriculture have also been increasing. The MSPs for various varieties of paddy during the years 2009-10 was between ₹ 950-980 per quintal and during the years 2010-11, it increased to ₹ 1000 to 1030 per quintal.

Moreover, for pulses such as Arhar and Moong the MSPs in years 2009-10 was ₹ 2300 and ₹ 2760 respectively, while in years 2010-11, it increased to ₹ 3000 and 3170 respectively. Another major cause of inflation is the increase in the prices of fuel internationally, which is contributing to the overall price inflation. There has been a steady increase in the international prices, with the Indian crude basket priced at $11 3.09 per barrel, as on May 2011. Any change in price of diesel immediately impacts price of food items, since most of them are dependent on transport through several 100 km. Inflation, in short, is “too much money chasing too few goods”. According to analysts, corruption, mafia operations, greed for money by politicians and industrialists, counterfeiting of currency notes etc., also contribute to corruption as they add to the availability of liquidity in different forms, which in turn adds to inflation.

High level of inflation distorts economic performance. It has added pressure on the Central Bank to raise rates despite signs of slow growth in the Indian economy. Thus, high inflation and rising interest rates are crimping domestic demand and slowing down the economy. Inflation also affects investment as higher long-term inflation adversely affects growth and investment. High inflation is pushing up the cost of credit for firms as well as escalating their input costs by inflating their spending on raw materials and wages. Corporate investment is affected by cost escalation of inputs, and inflation is waning the confidence in the economic growth.

Short Essay on Inflation 150 Words in English

Below we have given a short essay on Inflation is for Classes 1, 2, 3, 4, 5, and 6. This short essay on the topic is suitable for students of class 6 and below.

Food inflation adversely affected the country in 2013 and 2014 consecutively. Curbing the prices of goods is essential in order to attain revival from the slowdown in economic growth. Food bills already consume 35% of household incomes.

Inflation, as pointed, out by economists, occurred due to weak monsoon needed for the cultivation of summer crops. Despite being the second largest producer of fruits and vegetables after China, India suffers from shortages, owing to the lack of efficient cold storage and transport facilities. RBI Governor though, has promised to cut down inflation to 8% by 2015. All measures to curb inflation would be successful only if the middle men in the supply chain are barred from carrying out their nefarious activities. Only can then we not lose out on onions and tomatoes on our dinner plates.

Inflation Essay Word Meanings for Simple Understanding

• Output – the material produce or yield, product
• Escalating – to increase something in extent
• Accelerating – to cause faster or greater activity, development, progress, advancement
• Crude – lacking finish, polish, or completeness
• Counterfeiting – made in imitation so as to be passed off fraudulently or deceptively as genuine
• Distort – to give a false, perverted, or disproportionate meaning to, misrepresent
• Crimping – to check, restrain, or inhibit; hinder
• Escalation – increase in intensity, magnitude, etc
• Waning – decreasing in strength, intensity, etc
• Revival – restoration to life, consciousness, vigour strength, etc
• Nefarious – extremely wicked or villainous
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