Inflation Essay Example | Topics and Well Written Essays - 1750 words - 1

Inflation - Essay Example Economists have defined inflation as the sustained general increase in the price of goods and services (Hart, 2010 p.10). When the prices goes up more money can only pay for fewer goods and services and the currency is said to have lost its purchasing power as the medium of exchange as well as the unit of account in an economy. when the prices goes up the situation is said to be price inflation while the money is in large supply the situation is referred to as monetary inflation((Hart, 2010 p.12). Several other concepts are related to inflation such as deflation which refers to a fall in the price levels generally while disinflation refers to a rate decrease in inflation. Hyperinflation is when the price increase is beyond control (Dwivedi, 2010 p.447). A general belief among economist is that inflation is caused by excess money supply in the economy which pushes demand for both goods and services. The measure of inflation is done through rating the increase in prices over a specified period of time. Inflation rate is expressed as a percentage and is calculated by working out the change in the price index and more so the consumer price index (Frisch, 1983 pg 9). The price index on itself cannot give the rate of inflation but it becomes useful when calculating the inflation rate. This rate is the percentage change rate of price index over a period of time. To calculate the inflation rate the formula below is used The widely used examples of indices to calculated inflation include consumer price index (CPI) which measures change in prices of goods and services(in a fixed basket) purchased by a consumer( Frisch, 1983 pg 12). This fixed basket has goods and services put together and are representative of the economy. The producer price index that measures price change in average as received by domestic producers. It measures the price paid by producers. It differs from the CPIs in that subsidizes in price, tax and profit may cause change in amount