What is Inflation?

Inflation is the hottest topic these days. Just about everybody you meet on the road talks about it. Do you really know what it means?

In plain terms, inflation is a rise in the general level of prices over time. That is, in terms of monetary units. It could also mean a rise in the price of a specific set of goods or specified services. Inflation is measured as the percentage rate of change of a price index.

What causes Inflation?

Mainstream economists hold that the high rates of inflation are a result of high rates of growth of the money supply. As for moderate rates of inflation, there are varied views on the factor that determine them. Sometimes fluctuations in demand for goods and services can lead to inflation. So can fluctuations in available supplies (i.e., changes in scarcity). This means that if there is a real demand or scarcity of goods and services, it can lead to changes in inflation. Inflation can also sometimes be caused by changes in the supply or demand for money.

Two camps disagreed strongly on the main causes of inflation at moderate rates during the mid-twentieth century. While the Keynesians the mid-twentieth century argued that real demand was often more important than changes in the money supply, the monetarists argued that money supply dominated all other factors in determining inflation.