Friday, August 19, 2016

What Is Inflation?

Inflation could be a subject of a lifetime understanding for an economist. Thankfully, I am not one hopefully you are not one too, so let me explain in simple words.
Inflation means a rise in price level. For examole a kilogram of sugar was $0.50 last year and now it is let us say is $0.55. Let us also assume that prices of all other commodities remained unchanged. This means that not only the price of sugar has gone up by 10%, the inflation in the economy was 10%.
We can also say that the value of the currency, the $ in this case, has gone down by 10%, for while $0.50 could by 1 kg of sugar last year, it can buy only.0.91 kg now.
We have understood what is inflation, now let's understand whether it is good or not.
A low level of inflation is belueved to be good for the country and its economy. Why? Because prices rise when demand is high, which in turn means that incomes of people has increased making them demand more. However if inflation is very high it is not good for the people as theit currency is depreciating rapidly and becoming worthless.
No or negative inflammation suggests lack of growth, which means low income, less number of jobs etc., and hence not good for the country.
Therefore all governments and central banks constantly struggle for maintaining inflation at low yet positive levels of one to five percent, thereby ensuring a healthy balance between growth and currency stability.

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