What is inflation?

There are many financial terms and jargons that people are unaware of. This article will be discussing the term inflation so that you can have a better understanding of the financial world.

İnflation

What is inflation? Inflation refers to the rate at which the general level of prices for goods and services are rising. This results in a decrease in the overall spending power and a decrease in consumer expenditure. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. To do this, they impose certain strategies. The two types of inflation are: (1) Cost-push inflation (2) Demand-pull inflation

What dictates the value of inflation?

Influencing factors
The rate of inflation rising can be influenced by many factors in the economic world. Cost- push inflation This type of inflation occurs when businesses respond to rising production costs. They respond by raising prices in order to maintain their profit margins. There are many reasons why costs might rise. Rising import costs
This is perhaps caused by inflation in countries that are extremely dependent on exports of these commodities. Alternatively, it can be caused by a fall in the value of the pound in the foreign exchange markets which increases the UK price of imported inputs. Rising labour costs
This refers to an increase in salary which exceeds any improvement in productivity. This is relevant to industries which are ‘labour-intensive’. Higher indirect taxes imposed by the government Demand-pull inflation Demand-pull inflation is more common when there is full employment of resources, and when SRAS is inelastic. In these circumstances, an increase in AD will lead to an increase in prices. AD might rise for a number of reasons. A depreciation of the exchange rate value
This increases the price of imports and reduces the foreign price of UK exports. If consumers buy less imports, while foreigners buy more exports, AD will rise. If the economy is already at full employment, prices are pulled upwards. A reduction in direct or indirect taxation
If direct taxes are reduced, consumers have more real disposable income, thereby causing demand to rise and an increase in consumer expenditure and in GDP. The rapid growth of the money supply and the rising consumer confidence as well as an increase in the rate of growth of house prices lead to an increase in total household demand for goods and services. Faster economic growth in other countries provide a boost to UK exports overseas. You can view all the current CPI and RPI rates online.