What is inflation?
Inflation is simply an increase in the level of prices. This means that you can buy less for your money. Most economists consider a normal level of inflation to be 2-3% per year. A negative inflation rate is called deflation, and signifies a drop in the overall level of prices.
Inflation can be measured in a variety of ways, but the most common method is using the Consumer Price Index (CPI). The CPI is a measure of goods and services purchased by a normal consumer. By using a CPI, economists can see how prices rise and fall over time.
Another way of gauging inflation is using a Retail Price Index (RPI). Like a CPI, it measures the changes in prices of goods and services over time. The RPI also includes mortgages, though. As a result, the RPI can show more dramatic changes when there’s a change in the interest rate.
What causes inflation?
Economists differ in opinion on what causes inflation.
The Monetarist view is that inflation is caused when there is too much money in circulation. While this occasionally occurs when a government prints too much money, it is usually the result of a drop in interest rates. When interest rates fall, consumers stand to gain less from saving. Instead of saving, they use the money to buy goods and services. However, the amount of goods and services available stays the same. Because there’s more demand for goods than there is for the money, the prices go up. This is called ‘demand-pull inflation’.
Keynesian economists disagree with the idea that too much money causes inflation, instead arguing that it is purely the effect of more demand for goods than can be met by the available supply.
Another type of inflation occurs when businesses have increased costs. In order to maintain their profit margins, they pass the increase on to the customers. The result is a higher price for the same goods. This is termed ‘cost-push inflation’. Cost-push inflation can be caused by a number of factors, including increases in workers’ wages, increases in raw material prices, and increases in import prices.
Low rates of inflation are considered normal, and demonstrate a healthy economy. When the inflation rate gets too high, though, it is a problem. The extreme version of this is hyperinflation.
The aftermath of inflation and hyperinflation
Hyperinflation occurs when inflation increases rapidly within an economy. It is generally defined as being a 100% increase over three years or 50% per month, but these are just guidelines.
Hyperinflation is primarily caused by three things: too much money being printed, large government debt, and inflation being left unchecked. The increase of the money supply is one of the most recognisable parts of hyperinflation. Images of people buying a loaf of bread with a wheelbarrow full of notes are common representations of such economic crises.
A notable example of hyperinflation was Germany in 1923, when prices were doubling every few days. The value of the Mark dropped so low, the currency had to be adjusted with the introduction of the Rentenmark. In some cases, though, a single currency adjustment isn’t sufficient. In Argentina, hyperinflation started in 1975 and was not fully controlled until 1992, after three currency adjustments in less than a decade. Brazil had a similar experience, adjusting their currency seven times between 1967 and 1994.
More recently, hyperinflation has been seen in Zimbabwe, where inflation reached a daily increase of 98%, making it the second worst hyperinflation in history. (The worst hyperinflation occurred in Hungary in 1946, with a daily inflation rate of over 207%.)
Hyperinflation causes a number of problems within an economy, which makes it even more difficult to control. The ‘menu cost’ problem, for example, is the problem of dealing with a rapidly increasing inflation rate. It is represented by the price of a menu item increasing in the amount of time it takes to eat it.
Another problem is the devaluation of savings. In unchecked inflation, the interest rate earned on savings can’t keep up with the inflation rate. Money that may have been saved in a more stable economy is suddenly worthless. This also leads to a lack of consumer confidence in finance, meaning that people stop trusting banks to handle their money.
While these problems are especially bad in hyperinflation, even moderate levels of inflation can cause problems. Higher inflation rates can result in lower competitiveness in international markets, which can itself lead to a devaluation of currency. Uncertainty over the future can also lead to lower rates of investment. That is, when consumers and businesses aren’t sure about the way inflation will effect their investments, they are less likely to invest. Instead, they will purchase goods. This can lead to a hoarding effect, in which people stockpile goods as a way of protecting wealth, thus creating a shortage of those goods.
Inflation is also a significant political motivator, and has been at the root of social and political upheavals. A high inflation rate often causes, or coincides with, a lack of confidence in a governmaent.
Yet, kept in check, inflation is seen as a normal part of a healthy economy. Low inflation rates or deflation can be bad for an economy as they generally signify a recession and can create as many problems as a high inflation rate can. Inflation rates are an important measure of an economy, and the control of inflation is a main factor in the monetary policies of governments around the world.
Dwindling Pension Returns – Why Saving No Longer Pays
Posted on 18 March 2012 | 2 responses
This report taken from Channel 4 highlights how today’s pensioners are seeing their hard earned money and pension returns dwindle in the face of high inflation & low interest rates. Ros Altmann of the SAGA Group & Ruth Lee interviewed by Faisal Islam back on 09 February 2012 discuss the PRO’s & CON’s of Quantitative Easing with CON’s quite easily taking 1st place.
John Major on the UK Economy
Posted on 17 March 2012 | No responses
John Major reflects on the UK recession in the early 90′s and gives comparisons to todays economic crisis. Also touching on Europe, Greek Defaulting and the UK’s position within Europe.
BOE report on UK Inflation as of February 15 – 2012
Posted on 17 March 2012 | No responses
2012 UK Budget Will See An Unpopular Hike in Business Rates
Posted on 11 March 2012 | No responses
Uk business rates are set to rise sharply in this years budget – Could this be the final straw for many small businesses and retail outlets already struggling to meet their monthly outgoings.
The rise of 5.6% has been set to reflect Septembers rise in inflation, however this has proved to be an unpopular move with the Government receiving a record number of of rate appeals from desperate business owners who now feel let down in this period of stagnated growth.
With many consumers now turning to the internet looking for better deals small businesses in UK have seen a drop in footfall and are finding it hard to compete with their already high overheads & decreased income. Many are now calling for rates to be unconnected with RPI (Retail Price Inflation) especially during these difficult times
Put Your Money in Food
Posted on 11 March 2012 | No responses
Uk Wage increases to Beat Inflation
Posted on 9 March 2012 | No responses
A recent survey conducted by Towers Watson shows evidence that a pay increase is likely to happen this year coming in at 3 per cent – only just nosing ahead of inflation currently placed at 2.9 per cent.
Increases will be seen throughout Europe – Africa and the Middle East with countries such as Spain, Germany and France benefiting a great deal better than the UK & Italy due to their lower rates of inflation.
UK employers seem to be taking a careful approach to any excessive pay increases due to the current economic climate although it does seem that companies are recognising and rewarding employees that excel in the work place at a much higher rate than colleagues.
An End to Inflation Busting Rail Fares?
Posted on 8 March 2012 | No responses
It is estimated that the British Rail Industry costs both the fare payer & tax payer around 3.5 billion pounds per year in inefficiency as shown in recent research conducted by Sir Roy McNulty.
The price of UK rail tickets has long exceeded rises in inflation year on year & it now seems that Network Rail along with the Office of Rail Regulator has decided that enough is enough. Plans of reform have been announced which if successful should slash this over spend by almost half. By 2014 it is hoped that a saving of 1.2 Billion pounds will have been achieved this should rise to 1.8 Billion in 2019.
Inflation Busting fare rises have long been accepted as a way of life by the British people – However with these proposals in place have we seen an end to sky high rail fares?
Retail Growth Falling Behind Consumer Price Inflation
Posted on 6 March 2012 | 1 response
Februarys figures for retail growth in the UK as reported by the British Retail Consortium show that sales last month grew to 2.3%, this is still well below (CPI) Consumer Price Inflation which is currently running at 3.6 per cent.
The main growth came from food sales with the consumer still reluctant to spend on non essential items & luxuries. Although the retail figures have shown signs of growth – profits will be hampered with smaller margins as UK retailers fight for custom with promotional and discounted offers.
No more Stimulus for the UK?
Posted on 5 March 2012 | 1 response
With increased inflation still a very real risk for the UK it is now looking unlikely for any further stimulus from the Bank of England in the form of bond purchasing.
Evidence of further growth – It is now looking like a double dip recession has narrowly been avoided , however the challenge that could now present itself would be high demand for wage increases should normal economic conditions return.
This along with the rising price of oil rearing its head again means inflation is still a very real risk and may apply pressure to the Bank of England to raise the base rate earlier than expected. Past predictions have speculated that this wouldn’t take place until 2014.
Paul Fisher Defending Quantitative Easing
Posted on 4 March 2012 | 2 responses