Price increases, or inflation, can be thought of as the gradual loss of purchasing power. The average price increase of a selection of products and services over time can serve as a proxy for the rate at which buying power declines. A unit of currency effectively buys less as a result of the increase in pricing, which is sometimes stated as a percentage. Deflation, which happens when prices fall and buying power rises, can be compared to inflation.
Human requirements go beyond simply one or two things, even if it is simple to track price changes over time for certain products. For a comfortable life, people require a wide variety of items as well as a variety of services. Commodities like food grains, metal, and fuel are among them, as are utilities like power and transportation, as well as services like labor, entertainment, and health care.
The objective of measuring inflation is to determine the overall effect of changes in price for a variety of goods and services. It enables a single value representation of the rise in the cost of goods and services over time in an economy.
Causes of Inflation
Inflation is caused by a rise in the supply of money, albeit this can happen through a variety of economic causes. The monetary authorities can boost a nation's money supply by:
- Printing new currency and distributing it to others.
- Legally lowering the value of the money that is legal tender.
- Purchase of government bonds from banks on the secondary market (the most popular way), which results in the creation of fresh money as reserve account credits for lending through the banking system. Three different sorts of inflationary mechanisms can be identified as a result of this: demand-pull inflation, cost-push inflation, and built-in inflation.